“The times they are a-changin.”
That’s what Bankruptcy Judge Michael E. Wiles of New York effectively said in his opinion recounting how the majority of courts have altered course and now calculate damages for termination of a lease using the so-called “time approach.” In his February 2 opinion, Judge Wiles differed with colleagues on the New York bench who had followed the so-called “rent approach” in decisions in 1999 and 2011.
The decision by Judge Wiles disfavors landlords, because the time approach yields lower claims in cases where the rent increases over the life of a long-term lease.
Asserting the time approach, the plan administrator objected to claims of landlords whose leases had terminated. The landlords wanted the rent approach.
The outcome turned on the language in Section 502(b)(6)(A), italicized below, which limits a claim for termination of a lease to “the rent reserved by such lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease, following the earlier of — (i) the date of the filing of the petition; and (ii) the date on which such lessor repossessed, or the lessee surrendered, the leased property; . . . .” [Emphasis added.]
Basically, the time approach calculates the rent that would have been owing for the first 15% of the remaining term of the lease following termination. The rent approach calculates 15% of the rent that would have been owing during the remaining term of the lease.
In leases where rent escalates over the years, the rent over the remaining term of the lease would be higher than the rent owing in the period of time following termination.
Judge Wiles found two cases in the Southern District of New York, both invoking the rent approach. The most recent opinion was in 2011.
Since the 2011 decision, Judge Wiles said that “the weight of the relevant authorities in other districts has shifted very strongly in favor of the Time Approach.” Indeed, he said, “All of the reported decisions that we have found that have addressed this issue since the beginning of 2012 have concluded that the Time Approach is the correct one.”
Judge Wiles also noted that the Collier treatise flopped from one camp to the other and advocated the time approach in 2015.
Saying he did “not lightly depart from prior precedent in this District,” Judge Wiles said he was “convinced that the Time Approach represents the correct view.”
First and foremost, Judge Wiles found the answer in the “plain language of the statute.” The “entire phrase,” he said, “is worded in terms of periods of time.” If the drafters had intended to apply the rent approach, he said that Section 502(b)(6) would have referred to “15 percent of the rent reserved for the remaining term of such lease . . . .”
Judge Wiles also said that the time approach “finds strong approach in the legislative history.” He held that the
claims are to be calculated by reference to the rents reserved under the relevant leases for the first 15% of the remaining lease terms, provided that such amounts shall not be less than the rents reserved for the first remaining year of the relevant lease terms, and shall not be greater than the rents reserved for the first three remaining years of the relevant lease terms.
Other Holdings of Note
The trustee and the landlords had other disagreements about damage calculation. For instance, was the cost to clean up the property subject to the cap?
Judge Wiles adopted the approach in Saddleback Valley Cmty. Church v. El Toro Materials Co. (In re El Toro Materials Co.), 504 F.3d 978 (9th Cir. 2007), where the Ninth Circuit asked whether the landlord would have the same claim had the lease been assumed.
In the case before him, the leases called for the tenant on termination to leave the premises “broom clean” and “in good order.” Therefore, cleanup costs arose from the termination and would be subject to the cap, because the landlord would not have had the claim were the lease assumed.
For mechanics’ liens, the result was otherwise.
The debtor had failed to pay contractors who filed mechanics’ liens against the properties. Under the leases, the debtor would have been required to pay off the liens. The landlords’ claims to pay off the liens were not subject to the cap because they “would have existed regardless of whether the lease was terminated.”
Similarly, the landlords’ claims to repair windows and the façade were not subject to the cap, because the claims would have belonged to the landlord if there were no termination.
“The times they are a-changin.”
That’s what Bankruptcy Judge Michael E. Wiles of New York effectively said in his opinion recounting how the majority of courts have altered course and now calculate damages for termination of a lease using the so-called “time approach.” In his February 2 opinion, Judge Wiles differed with colleagues on the New York bench who had followed the so-called “rent approach” in decisions in 1999 and 2011.
The decision by Judge Wiles disfavors landlords, because the time approach yields lower claims in cases where the rent increases over the life of a long-term lease.