When a debtor that is a landlord rejects a real property lease in bankruptcy, the tenant has a choice. Either the tenant can treat the lease as terminated or retain its rights under the lease. These rights include the use, possession, quiet enjoyment, subletting, and hypothecation of the property.

In a recent case, the parties and the court grappled with this question: when does the tenant need to make that decision? When the lease is rejected, or by some other date? Interestingly, neither the court nor the parties found case law on this issue. It was one of first impression. In re All Star Props., LLC, No. 25-41314, 2026 Bankr. LEXIS 1461 (Bankr. N.D. Ga. June 15, 2026).

The debtor owns and manages land in northern Georgia. In August 2025, it filed for chapter 11. It sought court permission to sell real property and reject a related lease.

The lease began in 2005, and its term on the petition date ran until 2028. But the lease was under market. The buyer offered $750,000 contingent on the debtor being able to reject the lease.

The tenant did not oppose the sale of the property or the motion to reject. But the tenant asserted that the proposed rejection did not preserve his rights under Bankruptcy Code section 365(h).

The tenant suggested language for the order approving the sale that, among other things, would allow the tenant to retain his rights to treat the lease as terminated or to retain possession for an unlimited time period. In other words, the tenant wanted the section 365(h) options preserved for the remainder of the lease term.

Perhaps not surprisingly, the debtor objected to the tenant’s proposed language. The debtor wanted the tenant to make his choice by a set deadline.

The court approached the issue as one of standard statutory construction. It began “with the words of the statute.” People for the Ethical Treatment of Animals, Inc. v. Miami Sequarium, 879 F.3d 1142, 1146 (11th Cir. 2018). “[C]ourts must presume that a legislature says in a statute what it means and means in a statute what it says there. When the words of a statute are unambiguous, then this first canon is also the last: judicial inquiry is complete.” Conn. Nat’l Bank v. Germain, 503 U.S. 249, 253-54 (1992). 

In addition, a court must “give undefined terms their plain, ordinary, and most natural meaning.” Boca Cjega Hotel, Inc. v. Bouchard Transp. Co., 51 F.3d 235, 237 (11th Cir. 1995). A term is ambiguous when the language at issue is “susceptible to more than one reasonable interpretation.” Med. Transp. Mgmt. Corp. v. Comm’r of I.R.S., 506 F.3d 1364, 1368 (11th Cir. 2007). The court must consider a term’s definition as well as “the specific context in which that language is used, and the broader context is of the statute as a whole.” Id. 

The court’s analysis started with dictionary definitions. “‘Terminate’ is defined as ‘to form an ending,’ ‘to come to an end in time,’ and ‘to extend only to limit (such as a point or line)’ by Merriam Webster and as ‘[t]o bring to an end, put an end, cause to cease’ by the Oxford English Dictionary. ‘Retain’ is defined as ‘to keep in possession or use’, and ‘to hold secured or intact’ by Merriam Webster and ‘[t]o keep in one’s own hands or under one’s own control’ by the Oxford English Dictionary.’” 2026 Bankr. LEXIS 1461, at *11.

The court observed that, “[i]n the ordinary sense, these terms seem to be diametrically opposed. However, given that termination contemplates an end but not a time frame, it seems that the words can coexist such that their ordinary meaning does not resolve the issue here [--] is there a time period in which a tenant must elect to end the lease and treat the lease as terminated or remain in possession.” Id. at *12.

The court also noted that rejection of an unexpired lease constitutes a breach and does not automatically terminate the lease, citing Bankruptcy Code section 365(g) and Mission Prod. Holdings v. Tempnology, LLC, 587 U.S. 370 (2019). In Tempnology, the Supreme Court said that when a lease is rejected, parties should look to “non-bankruptcy contract law, which can tell us the effects of breach.” 587 U.S. at 379.

In In re Allstar Props., Georgia law applied to the lease in question. “Generally, one injured by a breach of a contract has the election to rescind or continue under the contract and recover damages for the breach. . . . But to justify recession, there must be a material nonperformance or breach by the opposing party. . . . If the breach is not material, the party is limited to a claim for damages and cannot rescind the contract.” Forsyth Cnty v. Waterscape Servs., LLC, 303 Ga. App. 623, 633, 694 S.E.2d 102, 111 (2010). 

The court also noted that, under state contract law, retention by a party of its rights under a lease can lead to a waiver of the right to terminate. This means that coexistence of the two options, terminate (or rescind) and retain, “cannot be indefinite.” There must be a “point in time” when a tenant must make its decision. 2026 Bankr. LEXIS 1461, at *18.

The court concluded that, consistent with state contract law and “the teaching of Tempnology,” a tenant must decide “when the breach occurs.” “Indeed, all section 365(h) does is make express the law of contracts.” Id. at *19.

The court rejected the tenant’s position that he should have until the end of the lease term to make his decision. In its order approving the sale of the real property, the court added that section 365(h) applied and the tenant would have 45 days to make his decision to treat the lease as terminated or to retain the rights specified in section 365(h).