In a chapter 11 bankruptcy of a mall can a tenant with a long lease (10 yrs) have that lease taken away?

A lease of non-residential real property is considered an executory contract in the bankruptcy of the landlord. (An executory contract is basically a contract where both parties still have obligations at the time the bankruptcy case is filed). Bankruptcy Code Section 365 allows a debtor in bankruptcy to make an election to assume executory contracts, such as leases, or reject them. If the lease is assumed, the debtor landlord must: 1) cure any defaults or provide assurance that the default will be promptly cured; 2) compensate or provide adequate assurance that the tenant will be compensated for actual losses resulting from the default; and 3) provide adequate assurance of proper performance under the lease. The landlord debtor and tenant can fight over these elements in the bankruptcy court, or reach agreement, but the tenant must agree to the treatment offered or the court must find the requirements meet if the lease is assumed. There are also special rules relating to leases in a mall found in Bankruptcy Code Section 365(b)(3) but they are essentially applicable where the tenant is in bankruptcy. The landlord debtor does not have to make a decision on assumption or rejection of a non-residential lease until the time of the hearing to consider confirmation of the landlord debtor’s plan unless the tenant asks the court to decide sooner.

If the landlord debtor wishes to reject the lease, he is essentially breaching the lease and is liable for damages, although that liability is classified as an unsecured claim. However, the lease is not actually terminated and the tenant may accept the termination, or choose to remain in possession of the property under Bankruptcy Code Section 365(h). Bankruptcy Code Section 365(h) allows a tenant whose lease is rejected to remain in possession of the property through the term of its lease, including any extensions or renewal periods. Since the landlord is excused from performing his obligations under the lease, the tenant may deduct from the rent paid to the landlord the costs associated with performing obligations of the landlord that the landlord has stopped performing (such as providing power and water to the property).

However, recently more debtors have opted to use Bankruptcy Code Section 363 to sell most of the assets of the bankruptcy free of claims. There is currently uncertainly between the courts as to whether the ability to sell property during a bankruptcy case under Bankruptcy Code Section 363 allows the debtor to escape the tenant’s right to remain in possession of the property under Bankruptcy Code Section 365(h). Some courts allow the use of Bankruptcy Code 363 to remove the tenant, some do not, and some allow removal but require the debtor to pay the loss incurred by the tenant in losing the lease. (Since you are in New York, I will note that one of the cases allowing a sale under Bankruptcy Code Section 363 to cut off rights under Bankruptcy Code Section 365(h) is in the Southern District of New York - In re Downtown Athletic Club of New York City, Inc., 2000 WL 744126 (S.D.N.Y. June 9, 2000). Recently, it seems to me that courts are tending to disapprove of efforts to completely dispossess tenants in circumvention of Bankruptcy Code 365(h), but there are some decisions indicating that they can do so by paying to the tenant the value of the remaining lease term to the tenant. A tenant whose landlord has filed a bankruptcy should consider filing a motion to compel assumption of the lease if they wish to remain in the property, and should remain watchful during the case for any effort to use Bankruptcy Code Section 363(f) to sell the property free and clear of liens and claims.