Table of Contents
- 9 Questions Businesses Ask About Contracts and Leases in Bankruptcy
- Table Of Contents
- 1. What Counts As A Contract Or Lease The Bankruptcy Court Cares About?
- 2. Can A Business Keep Important Contracts And Walk Away From Bad Ones?
- 3. What Does It Mean To Assume A Contract Or Lease?
- 4. What Does It Mean To Reject A Contract Or Lease?
- 5. How Long Does A Business Have To Decide?
- 6. What Happens If The Business Is Behind On Payments?
- 7. Can The Business Assign The Contract Or Lease To Someone Else?
- 8. Can The Other Side Cancel Just Because Of Bankruptcy?
- 9. Are Some Contracts Treated Differently From Others?
- Commercial Real Estate Leases
- Intellectual Property Licenses
- Contracts To Make A Loan Or Extend Financial Accommodations
- Personal Service And Non-Delegable Agreements
- Franchise, Distribution, And License Agreements
- Final Tip: The Earlier The Contract Review Starts, The More Options A Business Usually Sees
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9 Questions Businesses Ask About Contracts and Leases in Bankruptcy
When a business starts thinking about bankruptcy, one of the first practical worries is rarely abstract. It is usually immediate and operational: What happens to the lease, the equipment agreement, the franchise deal, the software license, the supplier contract, or the customer agreement that keeps the company running?
That concern is well-founded. In many Chapter 11 cases, ongoing contracts and leases can shape whether a business continues operating, trims costs, sells assets, or restructures successfully. The Bankruptcy Code gives debtors tools to assume, reject, or sometimes assign certain ongoing agreements, but those tools come with deadlines, cure obligations, consent issues, and litigation risk under 11 U.S.C. § 365. The federal judiciary’s overview of Chapter 11 also notes that disputes over executory contracts and unexpired leases are a regular part of reorganization cases (U.S. Courts).
In this post, you’ll find answers to nine of the most common questions businesses ask about contracts and leases in bankruptcy, including timing, landlord rights, cure costs, assignment issues, and what often happens if a company keeps using a contract after filing. If you want a broader foundation first, it may help to start with this overview of how ongoing business agreements are treated in bankruptcy.
Table Of Contents
1. What Counts As A Contract Or Lease The Bankruptcy Court Cares About?
The phrase you’ll often see is “executory contract” or “unexpired lease.” In general terms, an executory contract is an agreement where important performance remains due on both sides. Courts and practitioners often use that concept to describe contracts that are still meaningfully ongoing at the time of filing. The U.S. Bankruptcy Court for the Southern District of New York gives a simplified description: if a contract or lease is executory, the debtor may assume it or reject it (SDNY Bankruptcy Court).
For businesses, this commonly includes:
- commercial real estate leases
- equipment leases
- vendor and supply agreements
- franchise agreements
- distribution contracts
- service agreements
- software and technology licenses
- intellectual property licenses
- some customer contracts
Not every agreement qualifies. A fully performed contract, for example, may fall outside the usual assumption/rejection framework. Whether an agreement is truly executory can become a contested issue, especially when one side argues the contract ended before bankruptcy or was already materially breached.
This is one reason many companies and creditors spend time early in a case building a contract inventory. Businesses trying to understand these categories in plain English often also look for a more general explanation of assumption, rejection, cure costs, and continuity planning, because classification can affect almost every next step.
2. Can A Business Keep Important Contracts And Walk Away From Bad Ones?
Often, yes — at least in concept. Section 365 of the Bankruptcy Code allows a debtor or trustee, subject to court approval, to assume favorable contracts and leases or reject burdensome ones (Cornell LII). That is one of the central restructuring tools in Chapter 11.
Here’s the business reality behind that legal rule:
- If a lease is central to operations, the debtor may seek to keep it.
- If a supply contract is overpriced, outdated, or operationally harmful, the debtor may seek to reject it.
- If a contract has value to a buyer, the debtor may seek to assume and assign it as part of a sale.
- If several locations are underperforming, the debtor may keep some leases and reject others.
That flexibility is one reason contract strategy often becomes one of the most consequential workstreams in a business bankruptcy. It can affect cash flow, staffing, store footprint, vendor relationships, and sale value.
That said, the idea is simpler than the execution. Assumption can require curing defaults and offering adequate assurance of future performance. Rejection can trigger claims. Assignment can raise consent disputes. Landlords and counterparties often object when they believe the debtor is shifting risk unfairly.
3. What Does It Mean To Assume A Contract Or Lease?
To assume a contract or lease generally means the debtor elects to keep it in place and continue performing under it, with court approval. Bankruptcy courts around the country describe assumption as a formal process typically handled by motion or through a plan, and local court procedures frequently require notice to affected parties and an opportunity to object (Middle District of Florida Bankruptcy Court; District of Arizona Bankruptcy Court).
From a business perspective, assumption often signals:
- the agreement is worth preserving,
- the debtor expects ongoing performance,
- the contract may be necessary to reorganize, and/or
- the contract has transfer value in a sale process.
Assumption is not usually just a statement of preference. It commonly requires the debtor to deal with prepetition defaults and show it can perform going forward. If the debtor later breaches an assumed contract, the consequences can be more serious because the agreement was affirmatively kept in place through bankruptcy process.
That is why companies often spend substantial time comparing contracts line by line before deciding which ones to preserve. In practice, the analysis is rarely just legal. It is also financial, operational, and strategic.
4. What Does It Mean To Reject A Contract Or Lease?
To reject a contract or lease generally means the estate chooses not to continue with that agreement. Under Section 365(g), rejection is treated as a breach of the contract or lease, typically deemed to occur immediately before the bankruptcy filing if the agreement had not already been assumed (Cornell LII).
That distinction matters. Rejection is often misunderstood as making a contract disappear. In many situations, it is better understood as a statutory breach mechanism. The non-debtor party may still have a claim for damages, but that claim is often treated as a prepetition unsecured claim rather than a demand for full ongoing performance.
For businesses, rejection may be used to:
- exit underperforming store leases,
- stop paying for unwanted services,
- terminate unfavorable supply arrangements,
- shed obligations tied to business lines that are being shut down.
For counterparties, rejection can be disruptive. A landlord may face vacancy. A vendor may lose a customer. A customer may lose a critical supplier. The practical consequences depend heavily on the contract type, the wording of the agreement, and specialized Bankruptcy Code provisions.
This is also where legal nuance matters most. A rejected lease, license, or franchise agreement does not always produce the same downstream rights. Different contract categories can trigger different remedies and protections.
5. How Long Does A Business Have To Decide?
It depends on the chapter and the agreement type, but commercial real estate leases get special attention.
For many executory contracts in Chapter 11, the debtor may assume or reject at any time before plan confirmation, unless the court orders an earlier deadline on request of the other party (Cornell LII). But for an unexpired lease of nonresidential real property, Section 365(d)(4) sets a more specific timeline: the debtor generally has 120 days from the order for relief to assume or reject, and the court may extend that period once, for 90 additional days, if the request is made before the initial period expires (Cornell LII).
In practical terms, many businesses filing Chapter 11 with retail, warehouse, office, or industrial leases face a fast-moving lease decision calendar. If the lease is not timely assumed within the statutory period, it may be deemed rejected, and the debtor may have to surrender the premises.
That timing pressure often changes the first months of a case. Instead of making lease decisions at leisure, debtors and landlords may find themselves negotiating quickly over cure amounts, assignment rights, extensions, and store-closing strategy.
The federal courts’ Chapter 11 overview also reflects how ongoing leases and contracts can become active litigation points during reorganization (U.S. Courts).
6. What Happens If The Business Is Behind On Payments?
If a debtor wants to assume a contract or lease and there has been a default, Section 365(b)(1) generally requires the debtor to:
- cure the default, or provide adequate assurance that it will promptly cure,
- compensate the non-debtor party for certain actual pecuniary losses resulting from the default, or provide adequate assurance of prompt compensation, and
- provide adequate assurance of future performance (Cornell LII).
This is where businesses often encounter the phrase “cure costs.” Those amounts can include unpaid rent, taxes, common-area maintenance, late charges, and other categories the contract or lease arguably makes recoverable. Counterparties and debtors sometimes dispute the amount, the timing, and whether particular charges count as cure.
For commercial real estate leases, there is another important layer. Under Section 365(d)(3), the trustee or debtor in possession is generally required to timely perform post-petition obligations under an unexpired lease of nonresidential real property until the lease is assumed or rejected (Cornell LII). That often means current rent and related lease obligations remain highly significant even while the debtor is deciding what to do.
Administrative expense concepts can also enter the picture. Section 503 addresses administrative expenses, including certain actual and necessary costs of preserving the estate (Cornell LII). In contested cases, the parties may litigate whether a particular post-petition obligation belongs in that category or is governed more specifically by lease provisions in Section 365.
For businesses, this often becomes a budgeting issue as much as a legal one. A company may want to preserve a valuable lease, but the cost of curing arrears can change the analysis quickly.
7. Can The Business Assign The Contract Or Lease To Someone Else?
Often yes, but not always.
Section 365(f) generally allows a debtor to assign an executory contract or unexpired lease notwithstanding many anti-assignment clauses, so long as the contract or lease is first assumed and the assignee provides adequate assurance of future performance (Cornell LII). This can be a major source of value in asset sales because a buyer may want the debtor’s favorable lease, customer contract, or supply agreement.
That said, assignment fights are common. The other side may argue:
- the contract is non-assignable under applicable nonbankruptcy law,
- the proposed assignee is not financially reliable,
- the assignee lacks industry qualifications,
- the assignment changes the bargain too much,
- the debtor has not cured defaults fully.
Section 365(c) can create additional limits where applicable law excuses the non-debtor party from accepting performance from or rendering performance to someone other than the original contracting party, and the non-debtor party does not consent (Cornell LII). This issue can become especially important with personal service contracts, some intellectual property arrangements, and agreements involving unique trust or specialized expertise.
In sale cases, assignment disputes often move fast because buyers want certainty. A business exploring restructuring or a sale may want a careful review of which agreements are actually transferable before a marketing process begins.
8. Can The Other Side Cancel Just Because Of Bankruptcy?
Usually not based solely on a bankruptcy-filing clause.
Section 365(e)(1) generally invalidates so-called ipso facto clauses — provisions that terminate or modify an executory contract or unexpired lease merely because of insolvency, financial condition, the bankruptcy filing, or appointment of a trustee (Cornell LII). In other words, many contracts cannot be ended automatically just because the company filed bankruptcy.
This protection is often one of the first things business owners ask about, especially when a landlord, franchisor, licensor, or vendor points to a contract clause saying bankruptcy is an event of default.
But the protection has limits. A counterparty may still raise other grounds for default that are unrelated to the filing itself, such as missed post-petition payments, non-monetary breaches, failure to provide insurance, or inability to deliver adequate assurance of future performance. And some contracts fall into categories with special rules or exceptions under Section 365.
So while bankruptcy can pause or complicate termination efforts, it does not automatically erase every non-bankruptcy enforcement right. The actual wording of the agreement, the nature of the contract, and the timing of the alleged defaults can all matter.
9. Are Some Contracts Treated Differently From Others?
Absolutely. This is where broad generalizations can become risky.
A few examples:
Commercial Real Estate Leases
As noted above, nonresidential real property leases are subject to specific timing rules under Section 365(d)(4), and the debtor generally has to perform post-petition obligations pending assumption or rejection under Section 365(d)(3) (Cornell LII).
Intellectual Property Licenses
Section 365(n) gives special protections to a licensee of intellectual property if the debtor as licensor rejects the contract. The licensee may elect to retain certain rights, subject to statutory conditions, rather than simply lose the license outright (Cornell LII). For technology companies, life sciences businesses, and software-driven operations, this issue can be central.
Contracts To Make A Loan Or Extend Financial Accommodations
Section 365(c)(2) states that a trustee may not assume or assign a contract to make a loan, extend debt financing, or provide other financial accommodations to or for the benefit of the debtor (Cornell LII). So not every important agreement can be saved through assumption.
Personal Service And Non-Delegable Agreements
If applicable law excuses the other party from accepting performance from someone else, assumption or assignment may be restricted under Section 365(c). This can arise in relationships built around personal trust, specialized skill, or unique regulatory obligations.
Franchise, Distribution, And License Agreements
These often trigger mixed questions about cure, adequate assurance, trademark or IP rights, assignment restrictions, and whether non-bankruptcy law limits transfer. Two franchise agreements that look similar commercially may be treated differently legally depending on state law, the contract text, and the nature of the obligations involved.
That variation is why businesses often find that “contracts and leases in bankruptcy” is really a collection of separate legal problems rather than one issue.
Final Tip: The Earlier The Contract Review Starts, The More Options A Business Usually Sees
By the time a company is preparing to file, management often knows which locations are working, which vendors are essential, which customer deals are profitable, and which agreements are draining cash. Turning that operational knowledge into a formal bankruptcy contract strategy can make a meaningful difference.
In general terms, businesses and counterparties alike often focus on a handful of practical questions early:
- Which agreements are truly essential?
- Which defaults are curable?
- Which leases have assignment value?
- Which counterparties are likely to object?
- Which agreements may not be assignable at all?
- Which deadlines arrive first?
Those questions can influence case timing, financing discussions, sale planning, and negotiations with landlords, licensors, customers, and vendors. They can also influence whether a company files with a workable plan or spends the first weeks of the case reacting under pressure.
In short, contracts and leases are rarely side issues in bankruptcy. They are often at the center of how a business preserves value, controls losses, and positions itself for reorganization or sale.
If your business is facing these questions, an attorney might help evaluate which agreements have documented value, which ones carry hidden cure exposure, and which strategies fit the company’s actual operations. Visit ReferU.AI to get matched with an attorney who has demonstrable experience in cases like yours — for free.
