Tenant in Chapter 11 Can't Assume Lease that Expired Before Bankruptcy Filing

February 27, 2024

What Happened: Wracked by COVID-19 financial struggles, a restaurant filed for Chapter 11 bankruptcy while continuing to operate its restaurant in Chicago’s prestigious Magnificent Mile District as a debtor-in-possession with hopes of assuming the lease after being discharged. But having entered into a series of forbearance agreements and still being owed about $1.3 million in rent, the landlord had serious misgivings about the tenant’s post-bankruptcy prospects and wanted the property back.

What Happened: Wracked by COVID-19 financial struggles, a restaurant filed for Chapter 11 bankruptcy while continuing to operate its restaurant in Chicago’s prestigious Magnificent Mile District as a debtor-in-possession with hopes of assuming the lease after being discharged. But having entered into a series of forbearance agreements and still being owed about $1.3 million in rent, the landlord had serious misgivings about the tenant’s post-bankruptcy prospects and wanted the property back. So, it contested the assumption, contending that the lease had expired under state law before the tenant filed for bankruptcy.

Ruling: The federal bankruptcy court in Illinois agreed and refused to let the tenant assume the lease.

Reasoning: Under Section 365 of the U.S. bankruptcy law, a debtor in bankruptcy may assume an unexpired lease it held before filing, as long as it cures any existing pre-bankruptcy defaults when it assumes the lease or provides adequate assurance that it will cure such defaults promptly. The court ruled that the tenant couldn’t exercise its Section 365 rights in this case because the lease had already expired under Illinois law by the time the tenant filed for bankruptcy in April 2023, citing the following timeline:

  • Oct. 10, 2022: The landlord provided five-day statutory notice informing the tenant that it was in rent default and listing the total amount owed ($1,081,936);
  • Oct. 25, 2022: The tenant received the five-day notice;
  • Nov. 1, 2022: The lease expired when the tenant failed to timely cure the default.

Under Illinois law, the fact that the landlord accepted partial rent after expiration didn’t reinstate the tenant’s lease rights.

  • In re Peking Duck USA, Inc., 2024 Bankr. LEXIS 43, __ B.R. __

 

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