Executory contracts in bankruptcy can determine whether a business keeps critical deals or faces costly defaults under tight court deadlines. This guide explains how Section 365 works for unexpired leases and other ongoing agreements, including assumption vs. rejection, cure costs, and “adequate assurance” in plain terms. ReferU.AI can connect you with a bankruptcy attorney who can help evaluate contract and lease strategy and protect business continuity.

Type

Grandchild

Status

Approved

Caption

Title (YouTube)

Caption X

Executory Contracts and Leases Explained: Assumption, Rejection, Cure Costs, and Business Continuity

When a business enters bankruptcy, some of the most urgent questions involve the deals that are still alive: the store lease, the equipment rental, the software license, the supply agreement, the franchise agreement, or the long-term services contract that keeps operations moving. Bankruptcy law gives debtors and trustees a structured way to decide which of those ongoing obligations stay in place and which do not.

That process usually centers on assumption, rejection, cure costs, and adequate assurance of future performance under 11 U.S.C. § 365. In general terms, assumption is the choice to keep a contract or lease in place, rejection is the choice to stop performing it as an estate obligation, and cure costs are the amounts that may have to be paid or addressed before assumption can be approved. The practical question behind all of it is business continuity: which agreements are essential to keeping the company alive, stabilizing value, or supporting a sale or reorganization? U.S. Courts materials on Chapter 11 note that litigation over executory contracts and unexpired leases is a common feature of reorganization cases.

Bankruptcy activity has also been rising. According to the Administrative Office of the U.S. Courts, business filings increased to 24,039 in fiscal year 2025, and total Chapter 11 filings were 8,937 nationwide. That backdrop helps explain why lease and contract strategy remains a central issue for distressed companies, landlords, vendors, and counterparties alike. U.S. Courts data

In this post, you’ll learn what executory contracts and unexpired leases are, how assumption and rejection work, why cure costs can become a major fight, and how these decisions often shape business continuity in Chapter 11 and other bankruptcy cases. For a broader foundation, it may help to start with this overview of bankruptcy and restructuring options, then circle back here for the contract-specific issues.

What Counts As An Executory Contract Or Unexpired Lease?

The Bankruptcy Code does not supply a detailed all-purpose definition of “executory contract,” which is one reason disputes arise. Courts often describe it as a contract where material obligations remain on both sides. Bankruptcy court guidance commonly gives examples like leases, rent-to-own arrangements, and other ongoing agreements where both parties still owe performance. Northern District of Iowa Bankruptcy Court FAQ

Typical examples can include:

Commercial real estate leases

Equipment leases

Supply agreements

Distribution contracts

Franchise agreements

Some intellectual property licenses

Maintenance and service agreements

Certain employment-related agreements

Not every agreement a business signed before filing will qualify. A contract that has already been fully performed by one side may fall outside this framework, and some rights may be governed by other Bankruptcy Code provisions or by nonbankruptcy law. That is one reason businesses often spend time early in a case identifying what really belongs on Schedule G and what does not. If you want the basics in plainer language, this primer on ongoing deals in bankruptcy gives a useful starting point.

What Does It Mean To Assume A Contract Or Lease?

Under Section 365(a), a trustee or debtor in possession, with court approval, may assume or reject an executory contract or unexpired lease. In practical terms, assumption is the decision to keep the agreement and bind the estate to it going forward.

Businesses often seek assumption when the agreement is valuable or operationally important, such as:

A profitable location lease

A key supplier agreement

A mission-critical technology contract

A customer contract that supports ongoing revenue

A contract that will add value in a sale process

Assumption is not simply a statement that the debtor likes the contract. It usually comes with conditions. If there has been a default, Section 365(b)(1) generally requires the debtor or trustee to cure the default or provide adequate assurance of prompt cure, compensate for actual pecuniary loss, and provide adequate assurance of future performance. 11 U.S.C. § 365(b)(1)

That is where assumption can become expensive. A business may view a lease as essential, but the landlord may respond with a cure notice claiming unpaid rent, taxes, common-area charges, attorneys’ fees, repair obligations, and other amounts. The assumption fight then turns into a negotiation or a contested matter over exactly what has to be paid, when, and in what amount.

What Does It Mean To Reject A Contract Or Lease?

Rejection is the opposite choice. The estate elects not to continue with the agreement. Under Section 365(g), rejection generally constitutes a breach, and in many situations that breach is treated as occurring immediately before the bankruptcy filing date.

That timing matters because it often converts the counterparty’s damages into a prepetition claim, which may be treated like other unsecured claims unless a more specific priority rule applies. Rejection does not necessarily erase the contract from history or eliminate every dispute attached to it. Instead, it often changes the remedy structure and the claim status.

In ordinary business terms, rejection is frequently used when a contract is:

Above-market

Operationally burdensome

No longer aligned with the business plan

Duplicative after a downsizing

Unnecessary in a liquidation or sale strategy

For many companies, rejection can free up cash and management attention. But it can also create major disputes with landlords, licensors, franchise systems, or critical vendors. The strategic decision is rarely just “keep or walk away.” It is more often a broader judgment about runway, operational risk, and the business model after filing. This is where a more focused discussion of how businesses sort contracts into keep-versus-exit decisions can help frame the analysis.

Why Cure Costs Matter So Much

Cure costs are often the hidden pressure point in assumption fights. A debtor may think a contract is valuable, but the economics can shift fast once the default bill arrives.

Section 365(b)(1) generally requires three things before assumption of a defaulted contract or lease:

Cure, or adequate assurance of prompt cure

Compensation for actual pecuniary loss caused by the default

Adequate assurance of future performance

The phrase “actual pecuniary loss” can become a battleground. Counterparties may assert items such as:

Past-due base rent

Additional rent

Taxes and insurance

Late charges

Repair and maintenance costs

Interest, where allowed

Attorneys’ fees, where the contract and applicable law support them

Nonmonetary default consequences

The Code also contains special language for certain nonmonetary defaults and specialized rules for shopping center leases and other assignments. 11 U.S.C. § 365(b)(3)

This is one reason distressed businesses often review leases and contracts long before a filing date. Small bookkeeping gaps, stale reconciliations, undocumented side agreements, or unresolved defaults can later turn into expensive cure fights. A company thinking ahead may find it useful to review this discussion of pre-filing preparation for lease and contract problems, especially when cash is tight and operational continuity depends on only a handful of counterparties.

What Is Adequate Assurance Of Future Performance?

Even if cure amounts are resolved, assumption usually requires adequate assurance of future performance. That concept protects the nondebtor party from being forced to continue a relationship with a debtor that still appears unable to perform.

What counts as adequate assurance depends on the facts. Courts may look at things like:

Current and projected liquidity

Postpetition payment performance

Access to financing

The feasibility of the debtor’s restructuring path

The identity and strength of a proposed assignee

Operational changes that reduce future default risk

For shopping center leases, the Code includes more specific protections, including provisions tied to rent, percentage rent, use, exclusivity, and tenant mix. 11 U.S.C. § 365(b)(3)

This is where business continuity becomes concrete. A debtor trying to preserve a flagship location or a core service contract often has to show more than optimism. It may need a credible operating story, a funding path, and evidence that future defaults are less likely.

How Quickly Does The Debtor Have To Decide?

Timing varies by chapter and by contract type.

In Chapter 7, Section 365(d)(1) provides a relatively short timeline: if the trustee does not assume or reject within 60 days after the order for relief, the contract or lease is generally deemed rejected, unless the court extends the period for cause within the statutory framework. 11 U.S.C. § 365(d)(1)

In Chapter 11, the timing can be more flexible for many executory contracts, but nonresidential real property leases have a more defined rule. Under Section 365(d)(4), the debtor generally has 120 days after the order for relief to assume or reject a nonresidential real property lease, and the court may extend that period by 90 days on motion made within the original period. Further extensions generally require the lessor’s prior written consent. That deadline often becomes one of the most important early-case pressure points for retailers, restaurant groups, multi-location operators, and any company carrying excess space.

Also important: under Section 365(d)(3), a debtor generally has to timely perform obligations arising after the order for relief under a nonresidential real property lease until it is assumed or rejected. In practical terms, rent and related obligations do not simply disappear while the debtor “decides.”

Counterparties can also ask the court to require the debtor to make the assumption-or-rejection decision sooner. Bankruptcy Rule 6006 and related procedures govern much of that process. Federal Rule of Bankruptcy Procedure 6006

Can A Debtor Assign A Contract Or Lease To Someone Else?

Often, yes—but assignment usually follows assumption. Section 365(f) generally allows assignment notwithstanding certain anti-assignment clauses, provided the debtor first assumes the agreement and provides adequate assurance of future performance by the assignee. 11 U.S.C. § 365; Rule 6006

This is a major reason executory contracts matter in going-concern sales. A buyer may not care much about old liabilities, but it may care a great deal about stepping into the right lease portfolio, vendor relationships, franchise rights, or customer contracts. In that setting, assumption and assignment can preserve value that might otherwise disappear.

That said, not every contract is freely assignable. Section 365(c) limits assumption or assignment in certain circumstances where applicable law excuses the nondebtor party from accepting performance from or rendering performance to another entity. 11 U.S.C. § 365(c) Those disputes often arise with personal services contracts, some government contracts, and some intellectual property or heavily regulated agreements.

How Assumption And Rejection Affect Business Continuity

From a distance, assumption and rejection sound technical. On the ground, they are often about whether the business can keep functioning next week.

Keeping Revenue Channels Open

If a company relies on a franchise agreement, software platform, supplier arrangement, or core facility lease, assumption may be closely tied to continued revenue generation. Losing one agreement can interrupt sales, payroll, manufacturing, or fulfillment.

Reducing Cash Burn

Rejection can help a business exit high-cost locations, redundant service agreements, or legacy deals that no longer fit the turnaround plan. That can preserve liquidity for payroll, inventory, customer support, and core operations.

Supporting A Sale Process

In many Chapter 11 cases, the value of the enterprise depends on whether the debtor can transfer key agreements to a buyer. Assumption and assignment can therefore become central to any sale timeline.

Stabilizing Counterparty Relationships

Bankruptcy often creates anxiety for landlords, vendors, customers, and licensors. Clear early decisions about contracts can reduce uncertainty and help the business hold onto the relationships that matter most.

Creating Litigation Risk

At the same time, assumption and rejection decisions can trigger contested cure disputes, lease-default fights, assignment objections, and damages claims. A company that treats these issues as routine paperwork may later face avoidable cost and delay.

That is one reason many troubled businesses revisit the common errors that drive up cost. This roundup of costly lease and contract mistakes in bankruptcy highlights the kinds of issues that often surface once a filing is underway.

Common Problems Businesses Run Into

A few recurring issues appear in many bankruptcy cases involving executory contracts and leases:

Incomplete Contract Inventory

Some debtors start the case without a clean list of all active agreements, amendments, guaranties, side letters, and default notices. That can make early decision-making much harder.

Underestimating Cure Exposure

A debtor may plan around past-due base rent and then discover taxes, CAM, repair claims, fee shifting, or disputed reconciliation balances.

Waiting Too Long On Nonresidential Leases

The Section 365(d)(4) timeline can compress negotiations quickly. Businesses with multiple locations may feel that pressure almost immediately after filing.

Assuming Every Anti-Assignment Clause Controls

Bankruptcy can override some contractual restrictions, but not all. The real question is often whether nonbankruptcy law independently excuses the counterparty from dealing with a new party.

Treating Rejection As A Full Eraser

Rejection is generally treated as a breach, not a time machine. Rights, claims, and damages issues often survive in altered form.

Failing To Tie Contract Decisions To The Actual Reorganization Plan

A lease may look attractive in isolation but still make little sense if the business model, footprint, or sale path is changing.

Many of the practical questions businesses ask at this stage are surprisingly consistent across industries. This FAQ-style guide on the questions owners and managers keep raising about contracts in bankruptcy can help readers spot issues early.

What Landlords, Vendors, And Other Counterparties Often Focus On

Counterparties typically look at the same process from a different angle. Their concerns often include:

Will postpetition obligations be paid on time?

Is the debtor using delay as leverage?

What exactly is included in cure?

If assignment is proposed, who is the new obligor?

Will use restrictions, exclusives, or operational covenants still matter?

If the contract is rejected, what damages claim remains?

For landlords in particular, store-level performance, use clauses, co-tenancy, repair obligations, and tenant mix can all become part of the adequate assurance analysis, especially in shopping center contexts under Section 365(b)(3). 11 U.S.C. § 365

Why These Issues Often Point To Specialized Legal Help

Executory contract and lease disputes can look deceptively narrow. In reality, they often sit at the intersection of bankruptcy law, state contract law, real estate law, licensing law, and distressed-M&A strategy. A single assumption motion can affect liquidity, creditor recoveries, operational continuity, and the timing of a sale or plan.

That complexity is one reason businesses in distress often look for counsel with demonstrable experience in highly similar matters—such as lease portfolio rationalization, franchise and distribution disputes, intellectual property license issues, or contested cure proceedings in Chapter 11. The lawyer who handles a routine filing may not be the same lawyer who regularly litigates a million-dollar cure dispute tied to a business-critical contract.

Short Summary

Assumption and rejection are among the most consequential decisions in a business bankruptcy. Under Section 365, the debtor or trustee may keep certain contracts and leases, leave others behind, and in some cases assign valuable agreements to a buyer or new operator. But assumption usually brings cure obligations, adequate-assurance requirements, and close court scrutiny. Rejection can reduce ongoing burdens, yet it often creates claims and contested issues rather than making the problem disappear.

For businesses trying to preserve operations, the real question is often not just which agreements exist, but which ones are essential to continuity, which ones create too much drag, and what it will actually cost to choose either path.

Visit ReferU.AI to get matched with an attorney who has demonstrable experience in cases like yours — for free.

Executory Contracts and Leases Explained: Assumption, Rejection, Cure Costs, and Business Continuity

Executory Contracts and Leases Explained: Assumption, Rejection, Cure Costs, and Business Continuity

What Counts As An Executory Contract Or Unexpired Lease?

What Does It Mean To Assume A Contract Or Lease?