Can a Receiver Reject a Lease like a Bankruptcy Trustee?

QUESTION: I am a receiver for an operating entity. It has three offices. The rent for one of the offices is excessive and the business does not need all the space. I have approached the landlord about giving back some of the space or terminating the lease, but no dice. Can I reject the lease like a bankruptcy trustee?

ANSWER: While trustees and receivers are different, there are many similarities. The Bankruptcy Code adopted many provisions from prior receivership practice. The power to assume or reject a lease is one of them. A receiver is not stuck with a defendant’s leases just because the receiver has been appointed or has taken possession of the property. The receiver merely has control of the leasehold, as an officer of the court. The receiver is entitled to retain possession for a reasonable period of time to enable him to evaluate whether it would be in the best interest of the receivership estate to affirm and adopt the lease or to reject it and return the property to the landlord. H. D. Roosen Company v. Pacific Radio Publishing Company, 123 Cal.App. 525, 534 (1932) (“The mere fact of possession does not, however, obligate the receiver to carry out executory contracts of the debtor”); Irving Trust Co. v. Desmore, 66 F.2d 21, 23 (9th Cir. 1933).

The receiver must pay for the use and occupancy of the property while the receiver decides whether to affirm or reject the lease. If the receiver affirms the lease, the receivership estate becomes liable for the rent that comes due under the lease and any other lease liabilities. If the receiver rejects the lease and returns possession of the premises to the landlord, bankruptcy law and receivership law differ on the estate’s liability to pay for the remaining term of the lease. The Bankruptcy Code, in general, provides that a landlord’s claim for a lease that has been rejected is limited to the rent reserved by the lease, without acceleration, for the greater of one year, or fifteen percent, not to exceed three years, of the remaining term of the lease, plus any unpaid rent due under the lease as of the date of the filing of the bankruptcy petition or the date the property was surrendered to the landlord, whichever is earlier. 11 U.S.C. § 502 (b)(6).

Receivership law has no such statutory provisions, and the liability of a receivership estate differs depending on the law of the state where the receiver was appointed. The general rule, however, seems to be that the landlord has no claim against the receivership estate. “Where the receiver rejects the lease, there is a difference of opinion as to the provability and allowability against an estate of the lessee in the hands of receiver, of rent reserved but unaccrued. In most instances, such a claim for rent has been denied.” AmJur 2d, Receivers § 209 (2014). Two general reasons are given for this. The first reason is, because the future rents have not yet accrued, the claim is contingent. Because it may be effected by, among other things, the landlord’s mitigation, the claim cannot be asserted in a receivership. The other is that, unlike a bankruptcy case, no discharge is given in a receivership and the lessee can, in theory, still remain liable for the obligations under the lease after the termination of the receivership. Most of the cases applying California law seem to support the proposition that the landlord does not have a claim against the receivership estate for the balance of the term of the lease if the receiver rejects the lease. Most of these cases, however, are from the 1930s or before.

Your question does not indicate how long you have been in possession of the premises and how you have made use of them. As indicated, merely taking possession of the premises does not result in a receiver’s affirming the lease. The receiver is entitled to a reasonable period of time to determine whether to affirm the lease or reject it. Sunflower Oil Co. v. Wilson, 142 U.S. 313, 322 (1892). However, affirmation of the lease may be signified by either an express agreement or by implication. What constitutes a reasonable time for the receiver to determine whether to assume or reject the lease is a factual question determined from all the facts and circumstances. There are cases, however, that hold that a receiver’s possession of the premises for even as long as a year may not constitute an affirmation. See North Kansas City Bridge and R. N Co. v. Leness, 82 F.2d 9, 12 (8th Cir. 1936) (finding the receiver’s nearly 17 month possession was not an adoption of the lease).