A debtor has the right to "reject" a lease of commercial property and to thereby limit its liability for future rent by the imposition of the Bankruptcy Code's statutory cap on damages. The rejected of the lease is viewed as a breach of the lease that occurred immediately prior to the filing of the bankruptcy, making the claim a pre-petition unsecured claim.

A debtor is generally required to peform all of its obligations under a commercial, non-residential real property lease until it is rejected. This would include the payment of contractual rent. Often there is the issue of when a duty under a lease "arose" - ie. before the petition date and/or before the rejection date. Post-petition lease obligations are generally given a statutory administrative priority in payment, requiring them to be paid prior to general unsecured creditors.

This status of priority may arise under section 503 or section 365(d)(3) of the Bankruptcy Code. This distinction may make a critical difference as administrative claims arising under section 503 may be subject to subordination, such as to debtor-in-possession financing while arguably not subject to subordination if administrative status is determined under section 365(d)(3). Status under section 503 may though present an advantage in that a chapter 11 plan cannot be confirmed unless such obligations are paid in full.

Generally, once a lease is rejected, if the debtor remains in possession by failing to vacate the premises, the estate is liable to the lessor for an administrative expense claim arising from the benefit to the estate for the continued use of the premises. Post-rejection usage of the premises that does not provide a benefit to the estate may not constitute an administrative claim. See, Solar Cosmetic Labs, Inc., 08-15793-BKC-LMI (Order Denying Request for Payment of Administrative Expense Claim by Cap-East Associates, Docket No. 487)