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Common Attornment Provision Held Ineffective After Master Lease and Sublease Rejected in Bankruptcy by Debtor-Sublandlord

Posted in the National Law Review an article by attorney  Howard J. Berman of  Greenberg Traurig regarding a subtenant of commercial office space was permitted to vacate its leased premises after the rejection of the master lease and sublease by the debtor-sublandlord:

GT Law

In Green Tree Serv., LLC v. DBSI Landmark Towers LLC,1 a case that is significant for landlords and leasing attorneys, the Eighth Circuit recently held that a subtenant of commercial office space was permitted to vacate its leased premises after the rejection of the master lease and sublease by the debtor-sublandlord, notwithstanding an attornment provision in the sublease requiring the subtenant to attorn2 to the landlord when the landlord either terminates the master lease or otherwise succeeds to the interest of the sublandlord under the master lease.

Because the Eighth Circuit’s decision hinges on an interpretation of an attornment provision that is common in many sublease agreements, landlords and practitioners must be careful to draft attornment provisions that do not run afoul of the decision.

 

 

In a strict construction of the attornment provision, the court determined that because the master lease was rejected by the debtor-sublandlord and not terminated by the landlord, the attornment provision was never triggered. Because the Eighth Circuit’s decision hinges on an interpretation of an attornment provision that is common in many sublease agreements, landlords and practitioners must be careful to draft attornment provisions that do not run afoul of the Eighth Circuit’s decision.

In Green Tree, the landlord leased an office building to the debtor, DBSI Landmark Towers Leaseco, LLC (“DBSI”), under a master lease. DBSI then subleased the property to Green Tree Servicing, LLC (“Green Tree”). The master lease agreement between the landlord and tenantsublandlord DBSI required that any sublease include a provision providing for the subtenant to attorn to the landlord in certain circumstances. The sublease agreement entered into between DBSI and subtenant Green Tree required Green Tree to attorn to the landlord if the “[landlord] ‘terminates the Master Lease’ or ‘otherwise succeeds to the interest of [DBSI] under the foregoing Lease.’” 3

After tenant DBSI filed for bankruptcy, it rejected its master lease as well as its sublease with Green Tree pursuant to order of the bankruptcy court. In its motion to reject, DBSI indicated that the sublease would be terminated as a result of the rejection. In response, Green Tree exercised its rights under section 365(h) of the Bankruptcy Code (which allows a tenant whose lease is rejected by a debtor-lessor to either remain in possession or treat the lease as terminated) to treat the sublease as terminated.4 Although sublandlord DBSI did not object to Green Tree’s election to terminate the sublease, the landlord objected, claiming that the terms of the sublease required subtenant Green Tree to attorn to the landlord.5Green Tree then commenced an action in Minnesota state court seeking a declaration that the sublease was terminated and that it could vacate its premises. The landlord removed the case to federal court and cross-claimed for a judgment affirming the sublease.

The Eighth Circuit rejected Green Tree’s argument that because it exercised its right to terminate the sublease under section 365(h) it had no obligation to the landlord under the attornment provision in the sublease, stating “nothing in section 365(h) indicates that a debtor-lessor’s rejection of a lease extinguishes a third party’s rights and obligations under the lease.”6 The court then analyzed the language of the attornment provision strictly and determined that it would be triggered only when the landlord terminates the master lease or otherwise succeeds to the interest of sublandlord DBSI.7 Because DBSI and not the landlord rejected the master lease in DBSI’s bankruptcy case and because DBSI rejected and terminated the sublease, the court held that the attornment provision was never triggered and that subtenant Green Tree was free to vacate the premises. 8In reaching this conclusion, the court noted that DBSI never assigned its contractual interest in the sublease to the landlord prior to DBSI’s rejection and termination of the sublease and that the landlord “could not succeed to the interest in the sublease that no longer existed . . . .”9 Here, the only contractual interest to survive under the sublease was the landlord’s right to attornment, which right was not triggered.10

In light of the court’s strict interpretation of the attornment provision, landlords must be careful to include language in attornment provisions in both the master lease and sublease making it clear that a subtenant must attorn to the landlord in the event that a master lease and/or sublease is rejected under section 365 of the Bankruptcy Code by a debtor-sublandlord.

1__F. 3d__, 2011 WL 3802800 (8th Cir. Aug. 30, 2011).

2The term “attorn” means ‘“[t]o agree to be the tenant of a new landlord.’” Id. at *1 n. 5 (quoting Black’s Law Dictionary,
147 (9th ed. 2009)).

3Green Tree Serv., 2011 WL 3802800 at *1

411 U.S.C. § 365(h)(1)(A) provides in pertinent part:

If the trustee rejects an unexpired lease of real property under which the debtor is the lessor and –

(i) if the rejection by the trustee amounts to such a breach as would entitle the lessee to treat such lease as terminated by virtue of its terms, applicable nonbankruptcy law, or any agreement made by the lessee, then the lessee under such lease may treat such lease as terminated by the rejection . . .

5 See Green Tree Serv., 2011 WL 3802800 at *1.
6 Id. at *2 (citation omitted).
7 Id. at *3.
8 Id. at *3.
9 Id.
10Id.

©2011 Greenberg Traurig, LLP. All rights reserved.

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