Daily Development for
Tuesday, November 7, 2000
By: Patrick A. Randolph,
Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu
BANKRUPTCY; LEASES;
REJECTION; DAMAGES; DEFINITION OF "RENT": A landlord's claim for
damages based on the prepetition termination of a lease is limited to actual
unpaid rent, subject to certain restrictions, and does not include other
charges due under the lease, including "unamortized allowances," late
charges, interest, attorney's fees and special "excused rent." In re
Smith, 249 B.R. 328 (Bankr. S.D. Ga. 2000).
Under 502(b)(6), where a
lessor of a defaulting bankrupt tenant is limited in its claim for damages for
the loss of the benefits of the lease. The landlord can claim only the greater
of one year's rent or the rent for 15 percent, not to exceed three years, of
the remaining term of the lease, following the earlier of termination of the
lease or the filing of the bankruptcy claim.
Here the Bankruptcy Court
adopts the three part test for defining rent enunciated by the Bankruptcy
Appellate Panel of the Ninth Circuit in In re McSheridan, 184 B.R. 91, 99 (9th
Cir. Bankr. 1995). Under that test, Section 502(b)(6) operates not only as a
mathematical cap on the amount of unpaid rent a landlord may have as a claim in
the erstwhile tenant's bankruptcy, but operates to limit the components of the
claim exclusively to charges that (1) are "designated as rent" (or as
"additional rent") or otherwise set forth as tenant's obligations
under the lease; (2) are "fixed, regular or periodic;" and (3) are
"related to the value of the property."
According to the lease in
this case, the "excused" rent was payable only in the event of a
lease default, and was therefore a penalty which could not be added to the
claim. The "unamortized allowances" were also due only in the event
of early termination. Consequently they could not figure into the computation
of the damages claim in bankruptcy, regardless of whether they were collectible
as a matter of state court damages.
Reporter's Comment: In
light of these cases, the landlord's lawyer has to exercise more systematic
thinking in drafting rent clauses than was present here, where it is important
for the landlord to have some right of recovery for tenant improvements and
other landlord concessions in the event of an early lease termination in
Bankruptcy.
On the other hand, bear in
mind that the test for defining "rent" for purposes of allowing the
lease termination damages claim in Section 502(b)(6), a test which has become
quite harsh, reflecting in some sense a view that rent is disfavored in that
context, may be completely different from the definition of rent used in
determining what the debtor must pay as an administrative expense in order to
maintain a lease post petition, under section 365. See, e.g., In re Cukierman, 242 B.R. 486 (Bankr. 9th Cir. 1999)
(debtor required to make promissory note payments postpetition under a lease in
which the payments were defined as "rent").
Readers are urged to respond, comment, and argue with the daily
development or the editor's comments about it.
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