V. UNEXPIRED LEASES IN BANKRUPTCY
Although this chapter is generally applicable to executory contracts and unexpired leases, the following section deals exclusively with unexpired leases in bankruptcy. Except as otherwise stated, the following information will apply equally to cases under Chapter 7, 11, 12 or 13 of the Bankruptcy Code. For convenience, the term "lessee" will refer to the party concerning which a case under the Bankruptcy Code has been commenced, but, except as otherwise stated, may be read interchangeably as "trustee" or "debtor in possession."
A. Generally
1. State Law Governs Absent a Specific Bankruptcy Provision
In Butner v. United States, 440 U.S. 48 (1979), which involved a dispute between a trustee and mortgagee over the right to rents from property, the opinion of Justice Stevens for a unanimous Court emphasized the applicability of state law:
The constitutional authority of Congress to establish "uniform laws on the subject of Bankruptcies throughout the United States" would clearly encompass a federal statute defining the mortgagee's interest in the rents and profits earned by property in a bankrupt estate. But Congress has not chosen to exercise its power to fashion any such rule. The Bankruptcy Act does include provisions invalidating certain security interests as fraudulent, or as improper preferences over general creditors. Apart from these provisions, however, Congress has generally left the determination of property rights in the assets of a bankrupt's estate to state law.
Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding. Uniform treatment of property interests by both state and federal courts within a State serves to reduce uncertainty, to discourage forum shopping, and to prevent a party from receiving "a windfall merely by reason of the happenstance of bankruptcy." The justifications for application of state law are not limited to ownership interests; they apply with equal force to security interests, including the interest of a mortgagee in rents earned by mortgaged property.
Id. at 54-55 (citations omitted).
2. Lease Includes Any Rental of Real Property
Section 365(m) provides that, for purposes of Sections 365, 362(b)(10) and 541(b) (2), leases of real property include "any rental agreement to use real property." Section 541(b)(2) provides that the interest of any debtor in a non-residential lease that terminated at its stated term before commencement of or during the case is not property of the estate and therefore not subject to Section 365. Section 362(b)(10) provides that the automatic stay does not stay an act by a lessor under a non-residential lease that has terminated before or during the case to obtain possession of the property.
B. Performance of Lease Obligations Pending Assumption or Rejection
An unexpired lease is not enforceable against the trustee or debtor in possession before it is assumed. A debtor in possession is not required to satisfy pre-petition rental obligations until it has assumed the lease. In addition, the lessor has no power to dispossess the lessee until such time as the lessee is required to assume or reject.
However, during the pendency of the bankruptcy case, prior to assumption or rejection, the trustee or debtor in possession is required to pay a use and occupancy charge for the use of the premises. Section 365(d)(3) requires the trustee to timely perform all the obligations of the debtor under any unexpired lease of non-residential real property, until such lease is accepted or rejected. Acceptance of such performance by the lessor does not waive or relinquish the lessor's rights under the lease. The Bankruptcy Code is silent as to the consequences of a failure of the trustee to perform pursuant to Section 365(d)(3). The court may extend the time for performance of any lease obligation that arises within 60 days after the order for relief, but the time for performance cannot be extended beyond the 60-day period. See 11 U.S.C. § 365(d)(3). Thus, in a non-residential real property...
