Table of Contents
- Executory Contracts and Leases: A Beginner’s Guide to Bankruptcy Treatment of Ongoing Deals
- What Are Executory Contracts And Unexpired Leases?
- Why Do These Agreements Matter So Much In Bankruptcy?
- What Does It Mean To “Assume” A Contract Or Lease?
- What Does It Mean To “Reject” A Contract Or Lease?
- What Happens To The Other Party’s Claim After Rejection?
- What Is A “Cure” Cost?
- What Is “Adequate Assurance Of Future Performance”?
- Can A Debtor Assign A Contract Or Lease To Someone Else?
- What About Clauses That Trigger Default Because Of Bankruptcy?
- How Long Does The Debtor Have To Decide?
- Does The Debtor Have To Keep Paying Rent While Deciding?
- Are All Contracts Treated The Same Way?
- Why Do Assumption And Rejection Decisions Matter So Early?
- What Are The Most Common Misunderstandings For Beginners?
- “Bankruptcy Automatically Cancels The Contract”
- “If The Contract Says ‘No Assignment,’ It Can Never Be Assigned”
- “The Debtor Can Keep A Contract Without Paying Old Defaults”
- “The Debtor Can Wait Forever To Decide About A Lease”
- How Do These Issues Affect A Business Sale In Bankruptcy?
- When Does It Make Sense To Speak With A Lawyer About These Issues?
- A Short Summary For Beginners
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Executory Contracts and Leases: A Beginner’s Guide to Bankruptcy Treatment of Ongoing Deals
If your business is in bankruptcy — or preparing for that possibility — one of the biggest practical questions is often surprisingly simple: what happens to the deals that are still in progress? That can mean a commercial lease, a vendor agreement, a franchise deal, a software license, a supply contract, or another arrangement where both sides still have work left to do.
In bankruptcy, those ongoing deals often fall into a category called executory contracts and unexpired leases. The rules around them can shape whether a business keeps key locations, preserves important relationships, exits expensive obligations, or transfers valuable agreements to a buyer. In general terms, this part of bankruptcy law can have a major effect on day-to-day operations and on the overall value of a restructuring.
This beginner’s guide explains the basics in plain English. In this post you’ll learn what executory contracts and leases are, what “assumption” and “rejection” mean, why timing matters, how cure costs and assignment issues come into play, and where business owners often run into expensive surprises. If you want a broader overview of the moving parts, this deeper explanation of how bankruptcy handles ongoing contracts and leases can help round out the picture.
What Are Executory Contracts And Unexpired Leases?
The Bankruptcy Code allows a trustee or debtor in possession, with court approval, to assume or reject an executory contract or unexpired lease under 11 U.S.C. § 365. The U.S. Courts’ Chapter 11 Bankruptcy Basics page also notes that litigation over executory contracts and unexpired leases is a common feature of Chapter 11 cases.
The Code does not provide a single, tidy definition of “executory contract.” But in everyday bankruptcy practice, the phrase usually refers to a contract where important performance remains due on both sides. A lease is the easiest example: the tenant still has to pay rent, and the landlord still has to provide possession and lease-related performance.
Common examples may include:
- Commercial real estate leases
- Equipment leases
- Supply agreements
- Distribution agreements
- Franchise agreements
- Some intellectual property licenses
- Service contracts
- Manufacturing agreements
A fully completed deal usually is not executory. If one side has already performed everything and only payment remains, the analysis may look different.
Why Do These Agreements Matter So Much In Bankruptcy?
Executory contracts and leases matter because they often sit at the center of the business itself.
A restaurant chain may depend on favorable store leases. A manufacturer may rely on supply contracts. A software company may depend on license rights and hosting agreements. A retailer trying to reorganize may want to keep profitable locations while shedding loss-producing ones. And a company trying to sell assets may see significant value in transferring desirable contracts to a buyer.
That is why Section 365 is often described as one of the most important tools in business bankruptcy. It can let a debtor preserve value by keeping beneficial agreements and stepping away from burdensome ones, subject to statutory conditions and court approval under Section 365.
What Does It Mean To “Assume” A Contract Or Lease?
To assume an executory contract or unexpired lease generally means the debtor elects to keep it in place and continue with it. The debtor is effectively saying: this agreement remains valuable enough to preserve as part of the bankruptcy case or reorganization.
Assumption is not usually free. If there has been a default, Section 365(b)(1) generally requires the debtor to cure the default, compensate the non-debtor party for actual pecuniary loss resulting from the default, and provide adequate assurance of future performance, with certain exceptions spelled out in the statute at 11 U.S.C. § 365(b).
In practical terms, assumption often raises questions like:
- How much past-due rent is outstanding?
- Are there unpaid taxes, CAM charges, or insurance obligations?
- Did the debtor miss operational covenants under the lease?
- What amount has to be paid to “cure” the default?
- Can the debtor realistically perform going forward?
These cure and performance questions often become heavily negotiated.
What Does It Mean To “Reject” A Contract Or Lease?
To reject an executory contract or lease generally means the debtor elects not to continue with it. Rejection can be a way to exit an arrangement that has become too expensive, unprofitable, or inconsistent with the restructuring plan.
Importantly, rejection is not always the same thing as erasing the contract from existence. Under 11 U.S.C. § 365(g), rejection generally constitutes a breach. In Mission Product Holdings, Inc. v. Tempnology, LLC, the U.S. Supreme Court explained that rejection operates as a breach, not as a rescission that automatically vaporizes all rights the contract previously granted.
That distinction can matter a lot. In some situations, the non-debtor party may still retain rights that survive a breach under applicable non-bankruptcy law. Here’s what this often means: bankruptcy can change remedies and claims, but it does not automatically rewrite every underlying contract right from scratch.
What Happens To The Other Party’s Claim After Rejection?
When a contract or lease is rejected, the non-debtor party often ends up with a claim for damages. In many cases, that claim is treated as a prepetition unsecured claim under the Bankruptcy Code’s framework, which may significantly affect how much is ultimately paid and when.
For landlords, there is an especially important statutory rule. 11 U.S.C. § 502(b)(6) limits the allowed claim of a landlord for damages resulting from the termination of a real property lease. The statute caps those damages based on a formula tied to the rent reserved under the lease, rather than simply allowing the full remaining rent stream through the end of the term.
For business owners, this is one of the first signs that bankruptcy treatment of leases can differ sharply from ordinary state-law contract expectations.
What Is A “Cure” Cost?
A cure cost is the amount a debtor generally has to pay, or provide adequate assurance it will promptly pay, in order to assume a defaulted executory contract or lease. Section 365(b)(1) addresses cure, compensation for actual pecuniary loss, and adequate assurance of future performance at 11 U.S.C. § 365(b).
In a lease context, cure costs may include:
- Past-due base rent
- Additional rent
- Common area maintenance charges
- Real estate taxes
- Late fees if enforceable
- Certain repair obligations
- Other accrued monetary defaults
In some cases, disputes also arise over nonmonetary defaults — for example, operating covenant violations or maintenance failures. The statute contains specialized language for some real-property lease defaults, and those details can become highly technical under Section 365(b).
For a business considering bankruptcy, cure exposure can become one of the biggest variables in deciding whether keeping a contract is financially realistic.
What Is “Adequate Assurance Of Future Performance”?
Even if cure amounts are resolved, assumption often requires adequate assurance of future performance. That phrase usually refers to evidence that the debtor — or an eventual assignee — can actually perform the agreement going forward.
The statute expressly requires adequate assurance in assumption and assignment settings under 11 U.S.C. § 365(b)(1)(C) and 11 U.S.C. § 365(f)(2)(B).
Depending on the facts, adequate assurance may involve:
- Proof of financing
- Operational history
- A buyer’s balance sheet
- Deposit arrangements
- Guaranties
- Evidence of business continuity
For shopping center leases, Congress added even more specific protections. Section 365 includes special rules addressing issues like radius clauses, location provisions, exclusivity, and tenant mix for shopping center landlords at 11 U.S.C. § 365(b)(3).
Can A Debtor Assign A Contract Or Lease To Someone Else?
Often, yes — but not automatically.
Assignment can be a major value driver in Chapter 11 sales. A debtor may try to assume a contract or lease and then assign it to a buyer. Section 365 generally overrides many contract clauses that prohibit, restrict, or condition assignment, as reflected in 11 U.S.C. § 365(f).
That said, assignment still comes with important limits:
- The debtor generally has to assume the agreement first
- Cure issues usually have to be addressed
- The assignee generally has to provide adequate assurance of future performance
- Some agreements may be harder or impossible to assign because applicable nonbankruptcy law excuses the counterparty from accepting performance from a substitute party under 11 U.S.C. § 365(c)
This area is one reason bankruptcy contract analysis can become very fact-specific. Two agreements that look similar at first glance may be treated very differently depending on assignment restrictions, governing law, and the nature of the performance owed.
What About Clauses That Trigger Default Because Of Bankruptcy?
Many contracts contain so-called ipso facto clauses — provisions stating that bankruptcy filing, insolvency, or financial condition triggers default or termination.
Section 365 generally limits enforcement of many of those clauses after the bankruptcy case begins. The statute says an executory contract or unexpired lease may not be terminated or modified solely because of a bankruptcy-triggered provision in many circumstances under 11 U.S.C. § 365(e)(1).
That protection can be very important for preserving going-concern value. Without it, many counterparties could attempt to cut off rights immediately upon filing.
Still, exceptions exist, and the details can matter. Contracts involving personal services, financial accommodations, or specialized nondelegable performance often raise additional issues under Section 365.
How Long Does The Debtor Have To Decide?
Timing depends on the chapter, the type of agreement, and whether the court orders a deadline.
For executory contracts and some leases in Chapter 11, the debtor may often have until plan confirmation, unless the court sets a shorter deadline on request of the other party under 11 U.S.C. § 365(d)(2).
But nonresidential real property leases are a major exception. Under 11 U.S.C. § 365(d)(4), if the debtor does not assume or reject an unexpired nonresidential real property lease by the earlier of plan confirmation or 120 days after the order for relief, the lease is deemed rejected. The court may extend that initial period for 90 days for cause, and further extensions generally require the landlord’s prior written consent.
That timeline can dramatically affect retail, restaurant, office, warehouse, and industrial reorganizations.
Does The Debtor Have To Keep Paying Rent While Deciding?
In many situations, yes.
For nonresidential real property leases, Section 365 generally requires timely performance of postpetition obligations until assumption or rejection under 11 U.S.C. § 365(d)(3). That usually means current rent and other obligations do not simply stop because a bankruptcy case has been filed.
For certain personal property leases in Chapter 11, the statute also addresses postpetition performance obligations after a specified period under 11 U.S.C. § 365(d)(5).
This is one reason businesses sometimes discover that a “wait and see” approach can become expensive very quickly. Delay may preserve optionality, but it may also keep administrative and occupancy costs running.
Are All Contracts Treated The Same Way?
Not at all.
Some categories are subject to special rules or recurring litigation, including:
- Intellectual property licenses
- Franchise agreements
- Government contracts
- Personal service contracts
- Shopping center leases
- Real estate leases with complex operating covenants
- Contracts that applicable law treats as nonassignable
Intellectual property is a good example. Section 365(n) provides special protections for certain intellectual property licensees if a debtor-licensor rejects the license, although trademarks historically produced additional litigation and were the focus of the Supreme Court’s decision in Mission Product Holdings.
The practical takeaway is that “executory contract” sounds like a single category, but the outcomes can vary quite a bit depending on the contract type and the law governing it.
Why Do Assumption And Rejection Decisions Matter So Early?
Because these decisions often affect cash flow, business continuity, vendor confidence, and sale value from the beginning of the case.
A company may be trying to answer questions like:
- Which locations are worth saving?
- Which contracts are above market?
- Which counterparties are essential?
- Which defaults are affordable to cure?
- Which agreements could be assigned to a buyer?
- Which relationships are too personal or too regulated to transfer?
These are not purely legal questions. They are business questions with legal consequences.
That is also why contract analysis often begins before a filing. If the debtor waits until after the petition date to identify cure exposure, assignment barriers, or looming lease deadlines, the restructuring timeline can tighten fast.
What Are The Most Common Misunderstandings For Beginners?
A few come up again and again.
“Bankruptcy Automatically Cancels The Contract”
Usually not. Rejection is generally treated as a breach, not automatic erasure, under Section 365(g) and the Supreme Court’s reasoning in Mission Product Holdings.
“If The Contract Says ‘No Assignment,’ It Can Never Be Assigned”
Not necessarily. Section 365(f) overrides many anti-assignment provisions, though other limits may still matter under Section 365(c).
“The Debtor Can Keep A Contract Without Paying Old Defaults”
Often not. If the debtor wants to assume, cure and adequate assurance issues usually come to the forefront under Section 365(b).
“The Debtor Can Wait Forever To Decide About A Lease”
Not for nonresidential real property leases. The statutory clock in Section 365(d)(4) can be unforgiving.
How Do These Issues Affect A Business Sale In Bankruptcy?
In many Chapter 11 cases, executory contracts and leases become central to a sale process.
A buyer may want:
- Store leases in profitable locations
- Customer contracts
- Vendor agreements
- Distribution rights
- Intellectual property licenses
- Warehouse or logistics arrangements
If those agreements can be assumed and assigned, they may enhance the value of the sale. If cure costs are too high, assignment is barred, or performance cannot be adequately assured, the expected value may shrink.
This is one reason bankruptcy sale negotiations often include detailed contract schedules, cure notices, objection deadlines, and assignment procedures. Rule 6006 of the Federal Rules of Bankruptcy Procedure addresses procedures involving assumption, rejection, and assignment of executory contracts and unexpired leases at Federal Rule of Bankruptcy Procedure 6006.
When Does It Make Sense To Speak With A Lawyer About These Issues?
Usually earlier than many business owners expect.
A business owner might be dealing with:
- A lease portfolio with multiple locations
- Arrears that could create large cure disputes
- Contract counterparties threatening termination
- A buyer interested in some agreements but not others
- Concerns about franchise, license, or assignment restrictions
- Questions about whether a contract is even executory in the first place
In situations like these, an attorney may help evaluate the mix of timing, leverage, and cost. The legal analysis often intersects with operations, accounting, and restructuring strategy, especially in Chapter 11.
A Short Summary For Beginners
Executory contracts and unexpired leases are the ongoing deals a business may still be living with when bankruptcy begins. Under Section 365, a debtor may generally choose to assume valuable agreements or reject burdensome ones, subject to court approval and statutory requirements at 11 U.S.C. § 365. Assumption often involves cure costs and adequate assurance. Rejection generally operates as a breach, not automatic contract erasure, as the Supreme Court explained in Mission Product Holdings v. Tempnology. And for commercial real estate leases, deadlines and postpetition payment rules can become especially important under Sections 365(d)(3) and (d)(4).
If your situation involves a lease, vendor agreement, franchise relationship, intellectual property license, or another ongoing business deal, a lawyer with demonstrable experience in bankruptcy-related contract disputes may be able to clarify the available paths and the tradeoffs attached to each one.
Visit ReferU.AI to get matched with an attorney who has demonstrable experience in cases like yours — for free.
