The Landlord, the Lease, and the Rejected Executory Contract

Under section 365(b)(1), a debtor that assumes an executory contract must cure or provide adequate assurance that it will promptly cure any default, compensate the landlord for actual pecuniary loss resulting from the default, and provide adequate assurance of future performance. The cure amount here is at least $28,500 in prepetition arrears plus April rent, and potentially attorneys' fees if the lease provides for them and they are reasonable. Harbor has $40,000 in cash, which could cover the cure, but using cash collateral requires court approval or consent of the secured party. Harbor must also show adequate assurance of future performance by the assignee. Under section 365(f)(1), an anti-assignment clause is generally unenforceable; the debtor may assign notwithstanding a provision that prohibits or conditions assignment, as long as the assignee provides adequate assurance of future performance. The fitness studio's financial condition, experience, and ability to pay $9,500 monthly must be demonstrated. The assignment does not change the nature of the tenancy merely because the use changes, unless the lease restricts use; Harbor should review the use clause. If the lease permits retail use generally, a fitness studio may be acceptable, but Bayside may argue the change increases risk.

Adequate assurance of future performance is a flexible standard; courts consider the assignee's financial strength, operating history, and the nature of the business. Harbor's own positive cash flow of $6,000 monthly is thin against $9,500 rent, so the assignee's finances matter more than Harbor's. The fitness studio should provide financial statements, a business plan, and evidence of capitalization. As to April rent, the failure to pay postpetition rent is a separate default; under section 365(d)(3), the debtor must timely perform all obligations arising after the petition date, including rent, until the lease is assumed or rejected. Harbor's failure to pay April rent is a postpetition default that could support relief from stay or conversion. The cash collateral issue is significant: Harbor's $40,000 is subject to a secured creditor's lien, and using it to cure arrears requires either consent or a court order providing adequate protection. Harbor could seek to use cash collateral to pay the cure, but the secured lender may object. The court will balance Bayside's right to cure against the secured creditor's interest. If Harbor cannot cure promptly, it may negotiate a cure schedule over time, which courts sometimes permit if the landlord is adequately protected. The anti-assignment clause does not excuse Bayside's objection, but Bayside can still challenge the adequacy of assurance.

If Harbor rejects the lease under section 365(a), the rejection is a breach of the lease as of the petition date under section 365(g). Bayside's damages are calculated under section 502(b)(6), which caps a landlord's claim for unpaid rent. The cap is the greater of one year's rent or 15 percent of the rent reserved for the remaining term, not to exceed three years. The lease runs through 2030, roughly nine years remaining; 15 percent of nine years' rent at $9,500 monthly (about $1,026,000 total) is roughly $153,900. One year's rent is $114,000. The greater is $153,900, which is below the three-year cap of $342,000. So Bayside's claim would be capped at approximately $153,900, plus unpaid prepetition rent of $28,500, subject to the cap's application. The cap applies to rent reserved, including accelerated rent, but not to damages for injury to the premises. Bayside's claim would be an unsecured claim, likely receiving a small distribution. Harbor should compare the cost of assumption and cure against the rejection claim. Rejection may be attractive if the lease is above market, but Harbor would lose the ability to assign it for value.