Distress & Turnarounds

Executory Contracts and Leases

Work the most powerful tool in a restructuring: the right to keep the contracts that make money, break the ones that lose it, and sell the good ones to somebody else.

  • Advanced
  • 8 min total
  • 12 chapters

What decision this helps you make: Which contracts and leases to assume, which to reject, what each choice costs, and how much of the counterparty's damages claim you are actually going to pay.

What this topic is

An executory contract is one where meaningful performance is still owed on both sides. In a US bankruptcy, section 365 lets the debtor pick through every such contract and lease and choose: assume it and keep it, reject it and treat the breach as a pre-filing claim, or assume it and assign it to a buyer, overriding the clause that says it cannot be transferred.

Why it matters

This is where restructuring value is actually created. A retailer with 300 leases, half of them above market, can shed the losers for capped unsecured claims while keeping and even selling the winners. A supplier whose contract is rejected discovers that years of remaining margin have become a claim worth cents. Both sides need to know the rules before the filing, not after.

Who should learn it

Operators and advisers running a restructuring, landlords and suppliers on the other side of one, distressed buyers pricing an asset purchase, and anyone whose business depends on a contract with a company that might file.

What you will understand

  • What makes a contract executory, and why the definition decides everything downstream
  • Assume, reject, or assign: the three choices, their deadlines, and their prices
  • Cure, adequate assurance, and why anti-assignment and insolvency-termination clauses mostly do not work
  • How rejection damages are capped for landlords and employees, and what a rejected licensee keeps

Prerequisites

Common misconception

"If they file, our contract is terminated and we are out." Rejection is a breach, not a rescission. The contract is not unwound, the counterparty keeps whatever rights it holds outside the promise the debtor stopped performing, and the claim that arises is a pre-filing unsecured claim, often capped, usually paid in cents, but real. The inverse error is worse: assuming the termination clause you drafted for exactly this event will fire. It will not.