Love Hurts: Distressed Commercial Real Estate Update — Courts Curtail Certain Landlord Rights

A pair of recent tenant-friendly bankruptcy court decisions have (1) limited the scope of landlord priority expense claims, and (2) made it easier for a tenant in bankruptcy to assume and assign a lease over its landlord’s objection. Knowing the current state of play with respect to distressed commercial real estate is essential for landlords and tenants alike to protect their rights and stay on top of shifts in jurisprudence.

Delaware Court Limits Scope of Landlord Administrative Expense Claims

The first case arose out of the chapter 11 cases for American Tire Distributors and its affiliates (the “ATD Debtors”), which sold substantially all of their assets in bankruptcy. Following the sale closing, the ATD Debtors rejected leases for two distribution facilities in the Carolinas. After vacating the spaces, the ATD Debtors left behind forklifts, racks, IT equipment, and a 55‑gallon drum of hazardous material. The landlord incurred roughly $125,000 in cleanup and removal costs, and sought to recover those costs as administrative expenses of the bankruptcy estate instead of rejection damage claims. Administrative expenses, as a general rule, are paid in full before general unsecured claims (claims based on the rejection of a lease are considered pre-bankruptcy, general unsecured claims regardless of when the lease is rejected).

The Delaware bankruptcy court rejected this argument because obligations to return a property in a specified condition arise from lease rejection — even if the tenant vacates before the rejection’s effective date. Earlier in the opinion, the court made clear that the landlord’s claim for unpaid rent during the period between the filing of the bankruptcy date and the rejection date was an administrative claim. The ATD decision underscores the importance of drafting. It may have been helpful to the landlord if, under the lease, the removal costs were considered a component of rent, to be paid as an administrative expense.

SDNY Clarifies What Constitutes “Adequate Assurance” for Commercial Lease Assumptions

In a January 2026 opinion, the bankruptcy court for the Southern District of New York clarified what can constitute “adequate assurance of future performance” for a court to approve the assumption and assignment of commercial leases in the chapter 11 cases of Broadway Realty I Co., and its affiliates (the “Broadway Debtors”). Under the Bankruptcy Code, a lease can only be assumed by a debtor and assigned to a third party if the debtor can show that it (in reality, the third-party assignee) can cure existing defaults and provide the landlord “adequate assurance” that the assignee can perform under the lease into the future.

The Broadway Debtors were landlords — comprised of more than 80 affiliated LLCs owning over 5,000 rent‑stabilized apartments across New York City. The Broadway Debtors sought chapter 11 protection amid widespread building‑condition issues, code violations, and looming foreclosures by their secured lender. After running a marketing and auction process, the Broadway Debtors decided to sell all their properties to Summit Gold, Inc., and assign their residential leases to Summit.

Tenant groups and the City of New York objected to the sale, arguing that Summit was incapable of providing “adequate assurance of future performance,” under the Broadway Debtors’ leases because Summit lacked an operational track record, financial certainty, and the management infrastructure necessary to cure thousands of outstanding building code violations (which the tenants and City alleged to be defaults under the leases) on an expedited timeline, and perform under the leases going forward.

Acknowledging the inexact nature of the term “adequate assurance,” the bankruptcy court rejected the objecting parties’ arguments. In the decision, the court noted that “adequate assurance” does not mean that a lease assignee must guarantee performance (or that all non-monetary defaults must be cured), and that the evidence produced by Summit was sufficient to show it could perform under the lease. Notably, Summit produced evidence that, among other factors, it had a $30 million initial remediation program (with $10 million allocated to immediate violation cures), an equity infusion of $113 million, and a materially deleveraged capital structure that cut financing costs by 45%, freeing cash flow for repairs.

The Broadway case illustrates the inherent tension between the technical requirements of the Bankruptcy Code, the flexibility of what it means to provide adequate assurance, and the desire of bankruptcy courts to approve the assumption and assignment of a lease. If it is remotely close, the landlord should expect that a bankruptcy court will approve an assumption and assignment of a lease over its objections.

Questions about how these recent decisions may impact your business? Reach out to Harold Israel, Jack O’Connor, or another member of LP’s Financial Services & Restructuring Group.