Can a receiver terminate a lease or contract?

In certain circumstances, the receiver may reject a lease or contract. The appointment of the receiver is an equitable remedy and the Court may make decisions based on the equities. Similarly, the receiver may be empowered to make decisions based on the equity and fairness of the situation notwithstanding the existence of specific contracts and leases.

For example, if, on the day prior to the appointment of the receiver, the owner of an office building who also happens to be a tenant of that same office building signs a 30-year lease at below-market rents without any annual escalations, and presents this lease to the receiver, the receiver may have the authority to reject such lease based on equitable considerations. If the receiver were to ratify the validity of the lease by accepting rent, it could impair the value of the property thereby damaging the rights of creditors and owners.

Similarly, if a business enters into a contract that is not arm’s length, not market rate, or that materially damages the company, the receiver may have the authority to reject such contract. The existence of such a contract may simply be a way to fraudulently transfer funds from the business to related parties. The equitable powers of the court and by extension the receiver may allow the receiver to reject a contract in such instance.