When a bankruptcy debtor rejects a lease, a landlord is entitled to a rejection damages claim. Under Section 502(b)(6) of the Bankruptcy Code, a landlord’s claim is capped at “the rent reserved by such lease, without acceleration, for the greater of one year, or 15%, not to exceed three years, of the remaining term of such lease.”

Courts have taken two different approaches in interpreting what constitutes the “15%” in the statute: (A) the remaining rent due under the lease; or (B) the remaining time under the lease.

The “Rent Approach”

Under the “rent approach,” a landlord’s claim is capped at the amount equal to 15% of the total dollar amount of rent that would be payable for the entire remaining term of the lease, so long as that dollar amount is at least equal to the rent due for one year rent and does not exceed the rent due for the next three years of the lease term.

Many long-term commercial leases provide for escalating amounts of rent due. Thus, the “rent approach” captures these rent escalations. Consequently, the rent approach may lead to a higher claim amount and potentially higher recovery for a landlord.

The “Time Approach”

Conversely, under the “time approach,” the landlord’s claim is capped at the rent that would be due during the time period equal to 15% of the remaining lease term, so long as that time period is at least one year and no more than three years.

Southern District of New York Follows the Time Approach

Courts in Delaware and New York have split on which approach to apply to landlord claims. Delaware courts and elsewhere have traditionally followed the time approach. Courts in the Southern District of New York have followed the rent approach. 

In a decision issued on March 26, 2024, in In re Cortlandt Liquidating, LLC, No. 1:23-cv-03262-MKV, the District Court for the Southern District of New York (Judge Mary Kay Vyskocil) affirmed a bankruptcy court decision that applied the time approach, finding the time approach to be the better interpretation of the statute.

This decision is a departure from the prior established precedent from New York bankruptcy courts, which had usually applied the rent approach. This decision is the first district court decision in the Second Circuit on this point and represents a shift in how landlord rejection claims will need to be calculated in the Southern District of New York moving forward.