Executive Summary
- What’s new: Courts remain split on how to treat “stub rent” in bankruptcy, with the November 2025 decision in Rite Aid clarifying the timing and priority of payment for such claims in the Third Circuit. Meanwhile, the Avianca ruling reflects a possible shift in thinking from the accrual approach to the billing date approach in the Second Circuit.
- Why it matters: The treatment of stub rent can have substantial monetary consequences for debtors, estates and landlords, particularly for companies with significant commercial lease portfolios considering bankruptcy in key jurisdictions.
- What to do next: Companies and landlords may want to closely monitor evolving case law in their jurisdictions, assess the impact of venue selection on stub rent treatment, and proactively manage lease obligations and related claims in bankruptcy proceedings.
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If rent is due on the first of the month and the tenant files for bankruptcy on the 15th before paying, how is the landlord’s claim for the post-petition portion of that month’s rent (between the 15th and the end that month) treated?
Is that portion, referred to as “stub rent”:
i. a post-petition administrative expense claim that must be paid promptly under the landlord-friendly provisions of the Bankruptcy Code,
ii. a prepetition administrative expense priority claim because of the benefit it provides to the bankruptcy estate (which needs to be paid in full to confirm a Chapter 11 plan), or
iii. an ordinary general unsecured claim that may result in little or no recovery for the landlord?
Courts are split, and the outcome is jurisdiction-specific and evolving. In a recent decision in In re New Rite Aid, LLC, Judge Michael Kaplan, of the U.S. Bankruptcy Court for the District of New Jersey, held that stub rent may qualify as an administrative expense but does not have to be paid until plan confirmation.
Given that how bankruptcy courts calculate stub rent can have substantial monetary consequences for debtors, their estates and landlords, the November 3, 2025, Rite Aid decision (as well as the February 2025 Avianca decision discussed below) may influence how debtors and their advisers evaluate venue options, particularly in cases where lease obligations and landlord relationships are central to the restructuring process.
Divergent Approaches: Billing Date Versus Accrual
The treatment of stub rent in bankruptcy has long been a source of confusion and litigation, with courts split between two primary approaches: the “billing date” approach1 and the “accrual” approach.2
Billing Date Approach
Under the billing date approach, an obligation to pay rent under a lease is deemed to “arise” when it becomes due under the terms of the lease, i.e., on the billing date. If that date falls before the bankruptcy filing, the full amount due — including the stub rent portion — is treated as a prepetition claim, regardless of when the underlying obligation accrues.
However, a landlord may still seek administrative expense priority status for the stub rent, for providing a benefit to the estate under Section 503(b) of the Bankruptcy Code. Under a billing date jurisdiction, though, such administrative expense claim would not have to be paid immediately.
Accrual Approach
Unlike the billing date approach, the accrual approach divides rent due under the lease into daily amounts and then looks to when the obligation was actually incurred or accrued in relation to the day of the month the petition was filed, rather than when it became due.
The daily rent due under the lease is divided into prepetition amounts (treated as general unsecured claims that may be entitled to administrative expense status for providing a benefit to the estate) and post-petition amounts (treated as special claims that must be paid timely under Section 365(d)(3) of the Bankruptcy Code),3 regardless of whether rent was billed post-petition under the terms of the lease.4
Circuit Split and Avianca
Third Circuit
The U.S. Court of Appeals for the Third Circuit has adopted the billing date approach to stub rent calculations, as established in In re Montgomery Ward Holding Corp.5 As described in more detail below, the Bankruptcy Code’s requirements with respect to the timing and payment of stub rent claims under this approach has been further interpreted by the recent decision in Rite Aid.
Second Circuit
Historically, bankruptcy courts in the Southern District of New York have adopted the accrual approach.6 However, recent developments in the Avianca case, albeit under different circumstances, have signaled a potential shift in the U.S. Court of Appeals for the Second Circuit toward the billing date approach.7
In In re Avianca Holdings S.A., the debtor had unexpired airplane leases and owed brokers rental payments for prepetition brokerage services, with some payments due more than 60 days after the bankruptcy filing but before the leases were assumed or rejected. When Avianca failed to make these payments, the brokers sought to compel payment under Section 365(d)(5) of the Bankruptcy Code, which governs obligations under personal property leases (unlike real property leases, which are governed by Section 365(d)(3)).8
The bankruptcy court held, and the district court affirmed, that Avianca’s obligations to pay additional rental payments under the aircraft leases arose when those payments came due under the lease schedules, which entitled the brokers to priority payment under Section 365(d)(5) of the Bankruptcy Code.
In determining whether Avianca’s obligation to make these payments arose prepetition (when the brokerage services were rendered and the leases executed) or post-petition (when the payments came due under the lease schedules), the Second Circuit ultimately adopted the billing date approach, holding that Avianca’s obligations to pay the additional rental payments arose when those payments came due according to the lease schedules.
In its decision, the court noted that “[t]he split [regarding the proper method for determining when a debtor’s obligation arises] has crystallized in the context of Section 365(d)(3), applicable to leases of real property, which is similar to Section 365(d)(5) in relevant part in that it also requires the debtor-in-possession to ‘timely perform all the obligations of the debtor … arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected,’” and that “the billing date approach is the approach most consistent with the text of Section 365(d)(5), the Bankruptcy Code as a whole, and sound bankruptcy policy.”9
Although Avianca dealt with personal property leases under Section 365(d)(5), not real property leases under Section 365(d)(3), the district court noted on appeal in Avianca that, “[g]iven the similarity in text, origin, and purpose of the [365(d)(3) and 365(d)(5)] (as well as the relative dearth of case law interpreting Section 365(d)(5)), courts often look to decisions construing Section 365(d)(3) in cases involving Section 365(d)(5).”10
The Second Circuit’s affirming of the district court and adoption of the billing date approach in the context of Section 365(d)(5) suggests a potential shift toward the Montgomery Ward line of cases and similar decisions from several sister courts, which have long favored the billing date approach.11
Rite Aid
In contrast to the Second Circuit’s decision in Avianca, which signals a potential shift away from the accrual approach and toward the billing date approach, Judge Kaplan’s decision in Rite Aid adheres to long-standing Third Circuit precedent applying the billing date approach while clarifying its practical application in terms of payment timing.
Rite Aid and certain affiliates filed for Chapter 11 bankruptcy in the District of New Jersey bankruptcy court on May 5, 2025. At the time of filing, the company was leasing certain retail space in New York, for which May rent — the stub rent at issue — was not paid prepetition.
The company made timely rent payments for June and July, and ultimately paid its May rent in September 2025. The landlord under the lease filed a motion seeking to collect late fees in connection with what it described as late payment of the May rent.
Judge Kaplan found that although the payment of the May stub rent in September 2025 was later than the landlord desired, the Bankruptcy Code does not require stub rent, which is treated as an administrative expense under Section 503(b)(1)(A) of the Bankruptcy Code, to be paid by a specific date, only that it must be addressed prior to plan confirmation.
As such, because confirmation had not yet occurred, the court found that the debtors’ September 2025 payment of May stub rent was timely, and the landlord was not entitled to late fees even though the rent was due months earlier under the terms of the prepetition lease.
On the core issue of stub rent, the court’s analysis and resolution were consistent with the billing date approach. Judge Kaplan confirmed that stub rent is an administrative expense and must be paid in full but not immediately, and that prior to confirmation, the Bankruptcy Code “imposes no deadline on the payments of stub rent.”
Takeaways
The Rite Aid decision clarifies the timing of payment for stub rent claims, while Avianca signals a potential shift toward the billing date approach in the Second Circuit.
Both decisions, and the cases that follow them, may lead to greater predictability for debtors, and new challenges and risks for landlords, regarding the treatment and payment of stub rent in retail bankruptcies.
Developments to watch include:
- The District of New Jersey as a venue of choice for retail debtors. The Rite Aid opinion highlights the growing significance of the bankruptcy court for the District of New Jersey as a strategic venue for retail debtors with substantial commercial lease portfolios. The Rite Aid court’s debtor-friendly approach makes New Jersey an increasingly attractive venue for large retail Chapter 11 filings, especially for companies seeking predictability and flexibility in managing lease obligations during bankruptcy.
- The billing date approach gains momentum post-Avianca. While addressing personal property leases under a different subsection of the Bankruptcy Code, the Second Circuit’s ruling — as well as the underlying bankruptcy court and district court decisions — in Avianca have indicated some support for the application of the billing date approach in the bankruptcy court for the Southern District of New York. This may more closely align the Second Circuit with the Third Circuit’s established precedent, which has long favored the billing date approach. Companies considering bankruptcy should consider closely monitoring how courts in key jurisdictions, especially the Southern District of New York, continue to interpret and apply the billing date rule, as it can materially affect the timing and amount of rent claims. The post-Avianca application of the billing date approach in the context of stub rent claims has yet to be litigated.
- Risks of conversion to Chapter 7 and administrative insolvency. Landlords concerned about the payment of stub rent face additional uncertainty if a case is converted from Chapter 11 to Chapter 7, or if the estate becomes administratively insolvent. While stub rent is generally treated as an administrative expense, there is no guarantee of full or timely payment in a Chapter 7 scenario or where a 363 sale is implemented but not followed by a Chapter 11 plan. Administrative insolvency can result in none or pro rata distributions among all allowed administrative claimants, diluting recovery for landlords. This risk is heightened in large retail bankruptcies where the estate’s liquidity is strained, and it underscores the importance for landlords to monitor the debtor’s financial condition and the progress of the case, and to advocate for prompt payment of stub rent where possible.
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1 Courts in the Third, Sixth, Seventh and Eighth Circuits have adopted the billing date approach. See Centerpoint Props. v. Montgomery Ward Holding Corp. (In re Montgomery Ward Holding Corp.), 268 F.3d 205, 209–12 (3d Cir. 2001); Burival v. Creditor Comm. (In re Burival), 406 B.R. 548, 550, 551–54 (B.A.P. 8th Cir. 2009); HA-LO Indus., Inc. v. CenterPoint Props. Trust, 342 F.3d 794, 796, 798–800 (7th Cir. 2003); Koenig Sporting Goods, Inc. v. Morse Road Co. (In re Koenig Sporting Goods, Inc.), 203 F.3d 986, 989–90 (6th Cir. 2000).
2 Referred to in some jurisdictions as the “proration” approach, courts in the Second, Fourth, Ninth and D.C. Circuits have applied the accrual approach. See In re Ames Dep’t Stores, Inc., 306 B.R. 43, 63–65 (Bankr. S.D.N.Y. 2004); In re Leather Factory, Inc., 475 B.R. 710 (Bankr. C.D. Cal. 2012); In re Circuit City Stores, Inc., 447 B.R. 475 (Bankr. E.D. Va. 2009); El Paso Props. Corp. v. Gonzales (In re Furr’s Supermarkets, Inc.), 283 B.R. 60, 66 n. 8 (B.A.P. 10th Cir. 2002); In re NETtel Corp., Inc., 289 B.R. 486 (Bankr. D.D.C. 2002).
3 Section 365(d)(3) provides that “[t]he trustee shall timely perform all the obligations of the debtor … arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected, notwithstanding section 503(b)(1) of this title.”
4 See In re Ames Dep’t Stores, Inc., 306 B.R. 43, 63–65 (Bankr. S.D.N.Y. 2004); In re Victory Mkts., Inc., 196 B.R. 6, 8–10 (Bankr. N.D.N.Y. 1996); In re Door to Door Storage, Inc., C17-1385, 2018 WL 1899361, at *2 (W.D. Wash. Apr. 20, 2018); El Paso Props. Corp. v. Gonzales (In re Furr’s Supermarkets, Inc.), 283 B.R. 60, 62 (B.A.P. 10th Cir. 2002); In re Handy Andy Home Improvement Ctrs., Inc., 144 F.3d 1125, 1126–29 (7th Cir. 1998).
5 See In re Montgomery Ward Holding Corp., 268 F.3d 209–12.
6 See In re Ames Dep’t Stores, Inc., 306 B.R. at 63–65; Child World, Inc. v. Campbell/Mass. Trust (In re Child World, Inc.), 161 B.R. 571, 573–77 (S.D.N.Y. 1993); Newman v. McCrory Corp. (In re McCrory Corp.), 210 B.R. 934, 939–40 (S.D.N.Y. 1997); In re Stone Barn Manhattan LLC, 398 B.R. 359, 365–68 (Bankr. S.D.N.Y. 2008). However, as the bankruptcy court in Avianca noted, “Child World itself cite[d] more than ten … cases on both sides of the [“billing date” vs. “accrual” approach] issue,” and noted that some courts, including then-Judge Sonia Sotomayor’s analysis in R.H. Macy, 1994 WL 482948, at *11–13, adopted the billing date approach. In re Avianca Holdings S.A., No. 20-11133 (MG), 2023 WL 494255, at *6 (Bankr. S.D.N.Y. Jan. 26, 2023), aff’d, No. 23 CIV. 1211 (KPF), 2023 WL 9016495 (S.D.N.Y. Dec. 29, 2023), aff’d, 127 F.4th 414 (2d Cir. 2025). Although Child World ultimately applied the accrual/proration approach in the context of Section 365(d)(3), the Avianca bankruptcy court found the application of the billing date approach in R.H. Macy “to be both correct, and squarely on point.”
7 See In re Avianca Holdings S.A., 127 F.4th 414, 425 (2d Cir. 2025). Courts in the Second Circuit have also applied the billing date approach in other contexts. See, e.g., Bullock’s Inc. v. Lakewood Mall Shopping Ctr. (In re R.H. Macy & Co., Inc.) 1994 WL 482948, at *10–13 (S.D.N.Y. Feb. 23, 1994) (tax assessment rendered post-petition but relating to a prepetition period); Urban Retail Props. v. Loews Cineplex Ent. Corp., 2002 WL 535479, at *5–8 (S.D.N.Y. Apr. 9, 2002) (lump sum payment obligation for reimbursement of construction costs that came due post-petition under the lease).
8 Section 365(d)(5) provides that “[t]he trustee shall timely perform all of the obligations of the debtor … first arising from or after 60 days after the order for relief in a case under chapter 11 of this title under an unexpired lease of personal property … until such lease is assumed or rejected notwithstanding section 503(b)(1) of this title, unless the court, after notice and a hearing and based on the equities of the case, orders otherwise with respect to the obligations or timely performance thereof.”
9 In re Avianca Holdings S.A., 127 F.4th 414, 422 (2d Cir. 2025) (quoting 11 U.S.C. § 365(d)(3)).
10 In re Avianca Holdings S.A., No. 23 CIV. 1211 (KPF), 2023 WL 9016495, at *4 (S.D.N.Y. Dec. 29, 2023), aff’d, 127 F.4th 414 (2d Cir. 2025).
11 The district court’s opinion also acknowledged that “Section 365(d)(3) and Section 365(d)(5) are not identical” and noted that “[while] the operative language of [Section] 365(d)(3) and (d)(5) are similar enough that cases under [Section] 365(d)(3) … are relevant to provide guidance to a court interpreting a situation under [Section] 365(d)(5), they are not necessarily ‘automatic’ or ‘dispositive.’”
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