### A Formula for Confusion

Monday, January 23rd, 2012Thanks to an active lobby in Congress, commercial landlords have historically enjoyed a number of lease protections under the Bankruptcy Code.Â Even so, those same landlords nevertheless face limits on the damages they can assert whenever a tenant elects to reject a commercial lease.

Section 502(b)(6) limits landlordsâ€™ lease rejection claims pursuant to a statutory formula, calculated as â€śthe [non-accelerated] rent reserved by [the] lease . . . for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease . . . .â€ť

This complicated and somewhat ambiguous language leaves some question as to whether or not the phrase â€śrent reserved for . . . 15 percent . . . of the remaining term of such leaseâ€ť is a reference to time or to money:Â That is, does the specified 15 percent refer to the â€ś*rent reserved*?â€ťÂ Or to the â€ś*remaining term*?â€ť

Many courts apply the formula with respect to the â€śrent reserved.â€ťÂ Â *See. e.g., In re USinternetworking, Inc.*, 291 B.R. 378, 380 (Bankr.D.Md.2003) (citing *In re Today’s Woman of Florida, Inc.*, 195 B.R. 506 (Bankr.M.D.Fl.1996); *In re Gantos*, 176 B.R. 793 (Bankr.W.D.Mich.1995); *In re Financial News Network, Inc.*, 149 B.R. 348 (Bankr.S.D.N.Y.1993); *In re Communicall Cent., Inc.*, 106 B.R. 540 (Bankr.N.D.Ill.1989); *In re McLean Enter., Inc.*, 105 B.R. 928 (Bank.W.D.Mo.1989)).Â These courts calculate the amount of rent due over the remaining term of the lease and multiply that amount times 15%.

Other courts calculate lease rejection damages based on 15% of the â€śremaining termâ€ť of the lease.Â *See, e.g., In re Ironâ€“Oak Supply Corp.*, 169 B.R. 414, 419 n. 8 (Bankr.E.D.Cal.1994); *In re Allegheny Intern., Inc.*, 145 B.R. 823 (W.D.Pa.1992); *In re PPI Enterprises, Inc.*, 324 F.3d 197, 207 (3rd Cir.2003).

For more mathematically-minded readers, the differently-applied formulas appear as follows:

Rent-Based Formula: | Maximum Rejection Damages = (Rent x Remaining Term) x 0.15 |

Â | Â |

Term-Based Formula: | Maximum Rejection Damages = Rent x (Remaining Term x 0.15) |

Earlier this month, a Colorado bankruptcy judge, addressing the issue for the first time in that state, sided with those courts who read the statutory 15% in terms of time:

â€śIn practice, by reading the 15% limitation consistently with the remainder of Â§ 502(b)(6)(A) as a reference to a period of time, any lease with a remaining term of 80 months or less is subject to a cap of one year of rent [i.e.,15% of 80 months equals 12 months] and any lease with a remaining term of 240 months or more will be subject to a cap of three years rent [i.e., 15% of 240 months equals 36 months].Â Those in between are capped at the rent due for 15% of the remaining lease term.â€ť

*In re Shane Co.*, 2012 WL 12700 (Bkrtcy. D.Colo., January 4, 2012).

The decision also addresses a related question:Â To what â€śrentâ€ť should the formula apply â€“ the contractual rent applicable for the term?Â Or the unpaid rent remaining after the landlord has mitigated its damages?Â Under the statute, â€śrents reservedâ€ť refers to contractual rents, and not to those remaining unpaid after the landlord has found a new tenant or otherwise mitigated.

Colorado Bankruptcy Judge Tallmanâ€™s decision, which cites a number of earlier cases on both sides of the formula, is available **here**.