Clifford Chance
Navigating the Rejection Maze: Covenants Running with the Land & Property Interests in Bankruptcy
June 23, 2025
A recent decision from the Bankruptcy Court for the Western District of Texas addressed the intersection of property interests—specifically, covenants running with the land in a gas gathering agreement—and the ability to reject an agreement containing such interests. The key takeaways are as follows:
- Executory contracts containing covenants running with the land or otherwise conveying real property interests can be rejected under Section 365 of the Bankruptcy Code.
- Unless otherwise provided for in the contract, a debtor's rejection of an executory contract does not reject any real property interests conveyed by covenants in the contract, and the real property interest conveyed by the covenant survives rejection.
- A court may be called upon to determine whether and to what extent a covenant running with the land or property interest was created under an executory contract and survives its rejection.
- Although not addressed in Hilltop due to a waiver of damages clause, a question exists as to whether injunctive relief, specific performance, or other equitable remedies may be available to the non-debtor counterparty to a rejected contract.
