Q: I know from prior articles that a receiver for a tenant entity has the right to reject a lease, if to do so is beneficial for the estate. Is the reverse true? If a receiver was appointed for a landlord, can he or she reject a tenant lease, in order to retake possession, if doing so would be beneficial to the estate?
A: No. While a receiver for a tenant can affirm and adopt a lease, or reject it and return the property to the landlord, See, D.H. Roosen Company v. Pacific Radio Publishing Company, 123 Cal. App. 525, 534 (1932), the reverse is not true. While the right to reject a lease flows from the general right of a receiver to reject executory contracts (much like a bankruptcy trustee can reject executory contracts and leases under 11 U.S.C. § 365) the few cases and commentators which discuss the issue agree a tenant can remain in place if its lease is rejected, so long as the rent is paid and the lease terms are complied with. Clark on Receivers, §445 (3rd Ed.1959). Gibbons v. Wasserman, 244 N.Y.S. 26 (1930) states the general rule that a receiver’s appointment “does not authorize the receiver to ignore defendant’s lease and bring an action for use and occupation against them.” See also, Fidelity Union Trust Co. v. 75 Prospect Co-op Apartment, 131 N.J. Eq. 387, 389 (1942) ( “does not permit him to dispossess tenants in disregard of their leases.”). There are limited exceptions however. A few case have held that a lease can be rejected if it was the result of fraud or entered into just prior to the receivership, with the intent to impair the receivership estate. See, Ferguson v. White, 213 Iowa 1053 (1932) where a new lease was entered into days before foreclosure suit was filed to have a receiver appointed and the new lessee was the son of the mortgagor’s family, who remained on the property.
The limitation on a receiver’s right to reject tenant leases is consistent with the Bankruptcy Code provisions on a trustee’s power to reject tenant leases. Under 11 U.S.C. § 365 (h)(1)(A) if a trustee rejects an unexpired lease of real property the tenant can treat the lease as terminated by the rejection or, if the lease has commenced, retain its rights under the lease and remain in possession as lessee. While rejection can not terminate a lessee’s possessory rights, it can affect a landlord’s other obligations under the lease. In re Flagstaff Realty Associates, 60 F.3d. 1031, 1034 (3rd. Cir. 1995) (“ The primary function of rejection is to ‘allow [ ] a debtor-lessor to escape the burden of providing services to a tenant.’ … rejection ‘reliev[es] the estate from covenants requiring future performance, such as the provision of utilities, repairs, maintenance and janitorial services by the debtor.’ [Citations omitted]”). The lessee’s remedy for the loss of services is its ability to offset any loss against the rent owed under the rejected lease. In re Upland Euclid Ltd., 56 B.R. 250, 252 (9th Cir. BAP 1985) [citing 11 U.S.C. § 365 (h)(2)—Now: 11 U.S.C. § 365 (h)(1)(B)].
There is a dearth of authority on the non-possessory effect of a landlord’s receiver’s rejection of a lease. It is likely that a court facing this issue would follow the Bankruptcy Code’s provisions, as they are an attempt to equitably balance the rights of the estate and the rights of a lessee. This issue rarely comes up in receiverships because receiver’s usually want to lease vacant space, not remove paying tenants.
