Executory Contracts and Leases: Assuming and Rejecting in Subchapter V
- Melissa A. Youngman
- 2 days ago
- 7 min read
Melissa Youngman, PA and Winter Park Estate Plans & ReOrgs represent businesses in Chapter 11 and Subchapter V cases before the United States Bankruptcy Court for the Middle District of Florida, including the Orlando, Jacksonville, Tampa, and Fort Myers divisions, with a primary practice footprint in Orange, Seminole, Osceola, Volusia, Lake, and Brevard counties.
When a business files for Subchapter V bankruptcy, one of the most consequential early decisions involves contracts and leases that were in place before the petition date. A retail tenant in Winter Park with three years remaining on a commercial lease, a manufacturer in Lake Mary locked into an above-market supply agreement, an Orlando restaurant group holding a lease on an underperforming location: each of these faces a specific legal question from the first day of the case. Does the debtor want this obligation going forward? And if so, at what cost?
The answers flow from 11 U.S.C. § 365, which gives a debtor-in-possession the power to assume or reject any executory contract or unexpired lease of the debtor, subject to court approval. The choice carries immediate financial consequences. Assumption binds the estate to the contract on its existing terms, and the resulting obligations are paid ahead of general unsecured creditors as an administrative expense. Rejection constitutes a breach, which converts the counterparty's claim into a general unsecured claim treated under the plan.
Understanding the § 365 framework before filing, not after, is part of sound pre-petition preparation for any Subchapter V case. What follows is an explanation of how assumption and rejection work, the specific rules that govern commercial real estate leases, and the Subchapter V dynamics that give these decisions added urgency.
What Makes a Contract Executory Under the Bankruptcy Code
Section 365 applies to executory contracts and unexpired leases, but the Bankruptcy Code does not define the word "executory." Courts apply a practical standard: a contract is executory when both parties have material, unperformed obligations remaining at the time the petition is filed. If only one party still owes performance, the contract is generally not executory, and § 365 does not govern it.
Common executory contracts in a small-business Subchapter V case include equipment leases, franchise agreements, vendor supply arrangements, software licensing agreements, and long-term service contracts. Non-residential real property leases are addressed by § 365 as well, but with several additional rules specific to commercial real estate that are discussed below.
The threshold question for every contract in a debtor's portfolio is whether § 365 applies at all. If the counterparty has fully performed and only a payment obligation remains, the contract may fall outside the executory framework. Getting that analysis right before the petition is filed shapes the strategy throughout.
Assuming a Contract or Lease: Cure, Assurance, and What Comes Next
Section 365(b) governs assumption. A debtor-in-possession that wants to assume an executory contract or unexpired lease must satisfy three conditions if the contract is in default at the time of assumption: cure all existing defaults (or provide adequate assurance that defaults will be cured promptly), compensate the counterparty for any actual pecuniary loss the defaults caused, and provide adequate assurance of future performance.
The cure requirement reaches all defaults, not only monetary ones. A debtor that failed to carry required insurance, neglected a maintenance obligation, or violated a use restriction must address those non-monetary defaults as part of the cure analysis. Counterparties frequently surface pre-petition defaults during the assumption process that were overlooked or quietly tolerated before the filing.
Once assumed, the contract becomes a binding post-petition obligation of the estate. The reorganized debtor steps into the agreement on its existing terms and must perform going forward. For a Subchapter V debtor building a plan of reorganization, every assumed contract represents a committed line item in the post-confirmation budget. An above-market lease or an unfavorable long-term service agreement that is assumed becomes a full obligation of the reorganized business, payable on schedule, ahead of distributions to general unsecured creditors. The assumption decision deserves the same financial analysis as the plan payment projections themselves.
Rejecting a Contract or Lease: The Business Case and the Legal Effect
Section 365(g) specifies the consequence of rejection: it constitutes a breach of the contract by the debtor, deemed to have occurred immediately before the petition date. That classification matters because it converts the counterparty's damages claim into a pre-petition general unsecured obligation rather than an administrative expense. The counterparty does not receive the elevated priority treatment that post-petition obligations receive; it joins the pool of general unsecured creditors to be paid under the plan.
Court approval of rejection is analyzed under a business judgment standard. The question is whether assumption or rejection benefits the estate, considering the contract's current value to the reorganized business relative to its ongoing cost. A below-market lease in an essential location and a vendor contract the reorganized business cannot perform profitably present opposite conclusions under that analysis.
One limit on rejection: it cannot unwind what has already been delivered. If goods have been shipped, services rendered, or a license already exercised, those completed performances remain with the party that received them. Rejection converts only the debtor's remaining, unperformed duties into a breach claim. The counterparty's already-received benefit is not clawed back.
The Landlord Damages Cap: How Section 502(b)(6) Limits the Cost of Rejecting a Commercial Lease
When a Subchapter V debtor rejects a commercial real property lease, the landlord's resulting claim for future rent damages is not unlimited. Section 502(b)(6) caps the allowed rejection damages at the greater of: one year's rent reserved under the lease, or 15 percent of the total rent remaining under the lease, not to exceed three years' rent.
An illustration using a common Central Florida scenario: a retail tenant in an Orlando-area strip center has four years remaining on a lease at $8,000 per month. Total remaining rent is $384,000. Fifteen percent of that amount is $57,600. One year's rent is $96,000. Because the one-year figure is higher, the allowed claim is capped at $96,000. That amount is treated as a general unsecured claim and paid through the plan alongside other unsecured creditors.
The cap is one of the most important numbers in a Subchapter V debtor's pre-petition planning. It means the cost of rejecting an unwanted commercial lease is calculable before the case is filed. In many situations, the capped claim is a fraction of the face value of the remaining lease obligation. For a debtor that has already vacated a location or is operating well below its contracted capacity at a given site, the rejection analysis often determines whether the plan can realistically be confirmed.
Commercial Real Estate Deadlines: Section 365(d)(3) and Section 365(d)(4)
Section 365 imposes two obligations on debtors with non-residential real property leases that interact directly with Subchapter V's compressed timeline.
Under § 365(d)(3), the debtor-in-possession must timely perform all post-petition obligations under a commercial lease pending the assumption or rejection decision. Post-petition rent continues to accrue on current terms and is treated as an administrative expense, payable currently. A Subchapter V debtor that fails to pay post-petition rent on a lease it has not yet formally rejected faces a landlord with grounds to seek relief from the automatic stay or to compel a decision.
Under § 365(d)(4), a non-residential real property lease is deemed rejected if the debtor does not assume it within 120 days of the order for relief, subject to a court-ordered extension not to exceed 210 days total. In a traditional Chapter 11 case, this deadline arrives during the early stages of plan negotiations, with room to maneuver. In a Subchapter V case, where the plan itself must be filed within 90 days under § 1189(b), the 120-day lease-decision window and the plan deadline arrive within weeks of each other. The lease portfolio decision cannot be deferred until confirmation. The calendar forces it.
Subchapter V Dynamics: Why the Timeline Tightens Every Decision
The convergence of § 365(d)(4)'s 120-day deadline and § 1189(b)'s 90-day plan deadline is one of the more underappreciated features of Subchapter V practice. In a traditional Chapter 11, a debtor might have six months or more to assess its contract portfolio while working toward a disclosure statement. Subchapter V removes that runway.
Pre-petition preparation in a Subchapter V case therefore requires a complete review of every executory contract and unexpired lease before the petition is filed. The debtor's counsel needs to know which agreements are essential and assumable, which are burdensome and should be rejected, what the cure costs are on the ones the debtor wants, and what the § 502(b)(6)-capped claims will be on the ones it intends to shed. All of that analysis feeds directly into plan feasibility.
One feature of Subchapter V that simplifies the process relative to traditional Chapter 11: in the Middle District of Florida, Subchapter V cases under § 1181 generally do not have a § 1102 unsecured creditors' committee. The Subchapter V trustee serves a different role, focused on facilitating a consensual plan. In a traditional Chapter 11, a creditors' committee would often scrutinize assumption and rejection decisions closely, adding a layer of negotiation to each choice. In most MDFL Subchapter V cases, the debtor and its counsel work through those decisions with the SubV trustee's involvement but without committee-level review, which can allow the process to move more directly.
Central Florida Businesses: The Practical Starting Point
Retail tenants, restaurant operators, service businesses, and professional practices across Orange, Seminole, Osceola, Lake, and Brevard counties routinely hold commercial leases and long-term contracts that are either assets to a reorganization or obstacles to it. Identifying which is which is pre-petition work, not post-filing work.
Melissa Youngman, PA and Winter Park Estate Plans & ReOrgs represent businesses in Chapter 11 and Subchapter V cases throughout the Middle District of Florida. For a full explanation of how Subchapter V works and who qualifies, see our cornerstone guide on What Is Subchapter V Bankruptcy.
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Melissa Youngman is licensed to practice law in the State of Florida and regularly represents debtors, creditors, and other parties in interest in the United States Bankruptcy Court for the Middle District of Florida. This blog addresses issues under federal bankruptcy law and Florida state law; the outcome of any specific matter depends on its particular facts and on statutes, rules, and case law that may have changed after the date of publication.
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