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In a departure from prior precedent in the United States Bankruptcy Court for the Southern District of New York (SDNY), a recent opinion by Judge Michael E. Wiles in In re Cortlandt Liquidating LLC,[1] effectively lowered the Bankruptcy Code section 502(b)(6) cap on rejection damages that a commercial real estate landlord may claim, by holding that the cap should be calculated using the “Time Approach,” rather than the “Rent Approach.”

Calculation of Lease Rejection Damages

On Sunday, December 27, 2020, President Trump signed into law the Consolidated Appropriations Act, which provides $900 billion in a second wave of economic stimulus relief for industries and individuals faced with challenges from the COVID-19 coronavirus.

The COVID-19 pandemic has triggered unprecedented levels of business disruption and forced numerous companies into bankruptcy in an effort to preserve dwindling liquidity and postpone creditor demands. Retailers, whose brick-and-mortar locations were already struggling to adapt to an increasingly online marketplace, have been among the hardest hit. A number of bankruptcy judges, faced with the prospect of an avalanche of forced liquidations, have thrown these debtors a lifeline by approving requests to suspend lease payments.

COVID-19 has had impacts on contracts relating to commercial undertakings (e.g., construction projects), commercial and industrial tenancies, and individual consumer transactions (e.g. bookings for events). Individuals or companies who are unable to meet their obligations may have to pay damages or forfeit deposits. Otherwise stable businesses may be sued and face lengthy litigation or possible insolvency.

On 1 April 2020, the Ministry of Law announced that it intended to introduce the COVID-19 (Temporary Measures) Bill (“Bill”) in Parliament within one week. The Bill aims to provide temporary relief and protection for individuals and companies who are unable to fulfil their contractual obligations because of COVID-19.

If the current coronavirus (COVID-19) situation persists, real estate lenders increasingly will be faced with the need to restructure loans in their portfolios. Lenders that held non-performing real estate loans during prior real estate downturns (e.g., 2008, 1990s) have no doubt embarked on the real estate workout process countless times before. However, with the passage of time, the lessons learned by real estate lenders of earlier eras may have faded from memory. Moreover, many of the lenders active in real estate finance today were not even on the scene during prior recessions.