renewal options. The lessees have constructed large office buildings on the properties. The improvements were financed through mortgages secured by the improvements and the lessees' leasehold interest in the ground. These mortgages, aggregating very substantial amounts, are held principally by various insurance companies and by the New York State Employee Pension Fund.
The typical leases provide that the lessee pay a basic annual rent plus additional rent computed on a percentage formula. With one exception, the lessees also pay all real estate taxes attributable to the building, and in many instances pay to the Trustees an amount equal to, or only slightly less than, the taxes attributable to the ground or air rights. In short, the leases are "net" leases. There are no financial obligations on the Trustees other than the payment of some taxes. The leases generate very substantial cash flow for the Debtor's estate.
From the standpoint of the lessees, on the other hand, the situation is more complex. The office buildings are large, and the lessees have entered into countless numbers of space leases in the buildings. While some of these leases are short-term, others are for extended periods. Moreover, the lessees, in operating the buildings, must compete for tenants in what is at times a highly competitive New York market; and they must deal with inflationary factors and rising real estate taxes affecting their costs, and generally run the risks associated with a volatile and highly competitive entrepreneurial venture.
The Trustees have concluded that the rentals paid by the lessees to the estate under the existing leases are less than the fair market rental for equivalent property in today's market. For present purposes, it will be assumed that this conclusion is correct. Thus, the Trustees' purpose in proposing to disaffirm these leases is to enable them to increase the rentals to the present fair market level, thus dramatically increasing the value of the Trustees' interest in the properties. Since these properties will eventually be sold pursuant to the Asset Disposition Program, the net effect of approving the Trustees' proposal would be to increase, quite substantially, the avails of the Asset Disposition Program.
It should be noted that the ultimate impact upon the Debtor's estate from pursuing the proposed course of action would be to expedite the satisfaction of the claims of secured creditors, and to dilute the participation by the general creditors and equity holders. That is, the lessees would have claims against the estate for damages occasioned by the disaffirmances, but these claims would be classified as unsecured pre-bankruptcy claims. However, no one entitled to object on that ground has expressed any objection to the Trustees' proposed disaffirmances. Moreover, if the lessees were held to be under an obligation to mitigate damages by passing the increases along to the sub-tenants, or if, as seems likely, they would choose that course in any event, the increase in unsecured claims against the estate might be relatively modest.
Section 70(b) of the liquidation provisions of the Bankruptcy Act, 11 U.S.C. § 110(b), authorizes the Trustee to reject "any executory contract, including unexpired leases of real property," but includes the following protective provision for the benefit of lessees:
"Unless a lease of real property shall expressly otherwise provide, a rejection of such lease or of any covenant therein by the trustee of the lessor shall not deprive the lessee of his estate."