Determining ‘Termination’: Calculating Lease Rejection Damages in Bankruptcy

A recent decision from the US Bankruptcy Court for the District of Massachusetts concludes that while reasonable minds may differ, the termination provisions of a lease do not necessarily control when a lease terminates for purposes of bankruptcy law. In this alert, we explain how the court viewed key events in the landlord-tenant relationship through the bankruptcy lens and provide key takeaways for participants in the commercial real estate space dealing with financially distressed situations.

The Herritt Case

A commercial tenant’s lease often represents one of its most significant obligations. Commercial leases may have terms running into decades, meaning landlords might be owed much more money than other creditors due to their expectations under the lease. This poses an issue for other unsecured creditors in bankruptcy, who share distributions from the debtor pro rata relative to the size of their respective claims. US Congress recognized this issue and imposed a limit on landlord claims in order to prevent them from receiving an outsize share of the distribution pool.

Specifically, Section 502(b)(6) of the Bankruptcy Code provides that the amount of a claim “for damages resulting from the termination of a lease of real property” cannot exceed the sum of:

1. The rent reserved by such lease, without acceleration, for the greater of one year, or 15%, not to exceed three years of the remaining term of such lease, following the earlier of:

   • The date of the filing of the [bankruptcy case].

   • The date on which such [landlord] repossessed or the [tenant] surrendered the leased property.

2. Any unpaid rent due under such lease, without acceleration, on the earlier of such dates.

The proper application of this formula is widely debated on multiple fronts, including its starting point: the moment of termination. The Bankruptcy Court addressed this aspect of the debate (and other important issues affecting commercial landlords and tenants)[1] in a thorough and thoughtful opinion issued on September 30, 2025, in In re Herritt, Case No. 23-12160.

Herritt involved a debtor who leased restaurant space in Boston, Massachusetts. The restaurant shuttered in March 2020 as a result of the COVID-19 pandemic, at which point the debtor (and his operating company co-tenant) ceased paying rent. The following events then ensued.

• In April 2020, the landlord sent a notice of default but the tenants responded that a force majeure provision in the lease excused their performance (a common argument in those days).

• In September 2020, the tenants determined the business was beyond saving and began taking steps to wind up.

• In October 2020, the landlord filed a complaint in state court for unpaid rent (but not possession).

• In January 2022, the landlord served notice of its intent to terminate the lease, which otherwise would have extended through January 2023.

• In February 2022, the operating company tenant filed for Chapter 7 bankruptcy.

• In December 2023, the individual debtor (Herritt) filed for Chapter 13 bankruptcy.

The landlord filed claims in both cases for amounts due under the lease through the end of its stated term of January 2023. After settling the company claims with the Chapter 7 trustee, the landlord pursued the balance against the individual debtor. The landlord argued that because the lease terminated upon the expiration of its term under Massachusetts landlord/tenant law, its claim was based on rent accrued during the life of the lease rather than damages accruing from a termination. The debtor objected, arguing the lease terminated for all intents and purposes in September 2020 (when the debtor alleged the business was winding up) and, therefore any remaining damages were capped pursuant to Section 502(b)(6).

The Court’s Decision on Termination

Conceptually, the Bankruptcy Court agreed with the debtor and rejected a bright-line application of state law to pinpoint termination. Because leases may only offer limited and narrow grounds for formal “termination,” tethering the Bankruptcy Code’s termination language to the lease would allow landlords to delay termination, continue accruing rent post-default through the end of the term, and thereby frustrate the intent of Congress in enacting Section 502(b)(6). While the court acknowledged that state law may control or inform when a termination has occurred in some circumstances, it concluded that Section 502(b)(6) affords a broader meaning to “termination” for purposes of bankruptcy law and requires a closer examination of the parties’ actions.

Based on the factual record, the court rejected the debtor’s argument that termination occurred in September 2020 when he stated the restaurant could not reopen and had to wind up. The court found this statement too equivocal and inconsistent with the debtor’s contemporaneous writings, which sought to reserve key rights under the lease and did not acknowledge a surrender of possession. Similarly, the court also rejected the landlord’s proposed termination date given the landlord’s notice of intent to terminate as of January 17, 2022. While the landlord argued that a notice of intent letter does not constitute termination under Massachusetts law, the court held that the landlord’s failure to withdraw the notice before January 17, 2022, was sufficient to trigger termination for purposes of bankruptcy law. As a result, the court scheduled further proceedings to determine the date of surrender and the calculation of any resulting cap on the landlord’s damages.

Key Takeaways for Commercial Lease Parties

Both landlords and tenants should take note of the Herritt decision, as it stands for the principle that relying on state law regarding lease termination and surrender will not necessarily carry the day in bankruptcy court. Routine mechanisms such as letters expressing an intent to terminate or a reservation of rights may have dramatically different economic consequences in subsequent bankruptcy proceedings. As a result, parties must weigh both their own and their counterparty’s actions carefully with respect to attempted surrenders of possession and lease terminations under an overhang of financial distress. In the event the tenant files for bankruptcy, landlords may be surprised to find their claims limited based on actions that equate to a termination, even if state law would provide otherwise. On the other hand, tenants who are contemplating the financial relief of bankruptcy may be able to reduce large rent claims by arguing that their prepetition actions constituted a termination even when the narrow terms of the lease or state law may provide otherwise.

If you have questions about proactive strategies to navigate these concerns, contact Justin A. Kesselman, James E. Britton, or your contact on the ArentFox Schiff Financial Restructuring & Bankruptcy team.