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05-07-2009, 05:01 PM
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Regarding the lease - the lessor is not a secured creditor.

While accounting rules require that long term leases be treated as debt on the balance sheet, bankruptcy law treats them as executory contracts - that is contracts with continuing unfulfilled obligations.

From what I understand (as a landlord) - the lessor generally gets screwed in bankruptcy proceedings. Subject to court approval, the lessee (tenant, debtor or trustee) in default on an unexpired lease MAY assume the lease obligations of the previous debtor. However the code also allows debtor (trustee) to elect not to continue to perform under a burdensome real property lease. The other party to the lease (the landlord) however can be forced to continue to perform if the property is valuable to the bankruptcy proceeding.

This makes some sense - often canceling the lease would make it impossible for the company to continue operations and would put recovery of any of the creditors capital impossible. But it really sucks for the lessor in a bankruptcy.

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