Key Takeaways

  • An executory contract is a legally binding agreement in which both parties still have significant obligations to perform before the contract is fully executed.
  • These contracts are commonly used in real estate, leases, service agreements, and business transactions, often extending over a long term.
  • In bankruptcy, the debtor can choose to assume (continue) or reject (terminate) an executory contract, which significantly impacts the rights and obligations of both parties.
  • Examples include installment land contracts, long-term service agreements, intellectual property licenses, equipment leases, and franchise contracts.
  • Key risks include default, misinterpretation of terms, and unequal obligations, all of which can have serious legal and financial consequences.
  • Buyers, tenants, and business partners should review executory contract terms carefully and consult an attorney, especially in high-value or complex transactions.

An executory contract holds people to duties they've been assigned to a specific date laid out in the contract. It goes into effect when someone files for bankruptcy and stipulates that the two people that signed still have an obligation to meet. If the obligations are not met, it's a breach of contract. These types of contract are usually between a borrower, debtor, and another party. 

Types of Executory Contracts

  • Most licenses dealing with intellectual property, supply agreements that are long-term, and franchise agreements are executory contracts.
  • A completed assignment or sale, an agreement that's completely terminated, an expired agreement, or anything of the like that's done prior to bankruptcy is usually not considered to be an executory contract. 
  • Licenses that are perpetual and exclusive are sometimes an executory contract, but you can make a case that they're a completed assignment for territory or rights. You have to examine other materials to determine whether the ongoing agreement fits the bill.  
  • Real estate leases are executory contracts, as tenants have to pay rent and, in exchange, the landlord provides them with a place to live.
  • Equipment leases are executory contracts. Someone provides equipment and someone pays rent for that equipment. 
  • Development contracts where development work is requested and payment is given upon the completion of milestones are also executory contracts.
  • Leases on vehicles and furniture that is rent-to-own are both kinds of executory contracts.
  • Timeshare contracts and utility contracts, including internet and telephone service, are both executory contracts.
  • Employment contracts and service and supply contracts are also executory contracts.

Common Examples and Industry Applications

Executory contracts appear across a wide range of legal and commercial settings, from everyday consumer agreements to highly complex business transactions. Understanding where they are most commonly used can help parties anticipate their rights and obligations.

Examples by context include:

  • Real Estate: Installment land contracts, lease-to-own agreements, and rent-to-own property sales are classic examples. Here, the buyer (or tenant) agrees to make regular payments over time, and the seller retains title until the final payment is made.
  • Business and Commercial Transactions: Franchise agreements, long-term supply or distribution contracts, and joint venture agreements often remain executory because performance by both parties is ongoing over a multi-year period.
  • Intellectual Property and Technology: Software licenses, technology development agreements, and patent licensing deals typically require continuing performance — for example, periodic royalty payments in exchange for ongoing usage rights.
  • Equipment and Asset Leasing: Vehicle leases, heavy machinery rentals, and office equipment contracts involve recurring payments and maintenance obligations over a fixed term.
  • Employment and Services: Employment contracts, consulting agreements, and service retainers require continued work by the provider and payment by the client throughout the contract term.

In all cases, the defining feature is that material performance remains due from both sides. If either party ceases to fulfill their obligations, they are likely in breach of contract.

How Executory Contracts Work 

When you enter into an agreement like a lease, you're paying for the right to use an item or property for an agreed-upon amount of time. It's a cheaper alternative to buying the property. While the lease is in effect, it's considered an executory contract.

The debtor, otherwise known as a bankruptcy trustee, in the agreement is the person who decides whether they “assume” (agree) or “reject” (refuse) to fulfill the obligations set out in an executory contract. The non-debtor party of the contract has to continue on as though bankruptcy has not been filed. If the debtor assumes the contract, then they have to pay their payments and other defaults in full and show that they can pay in the future.

If they choose, the debtor can assume the contract but assign it to someone else. That someone else is typically a buyer of the debtor's assets. If the debtor chooses to do this, they have to pay any defaults. The buyer then has to prove that they can perform the obligations of the contract in the future. 

With the exception of leases for commercial real estate, you have 60 days from the filing of bankruptcy to reject or assume an executory contract. The only way to change the deadline is to go to the bankruptcy court. The rules of bankruptcy that govern executory contracts are pretty complex. If you're unsure whether your agreement is an executory contract, consult a bankruptcy attorney when the debtor files bankruptcy. 

Executory Contracts in Bankruptcy Proceedings

Executory contracts play a significant role in bankruptcy law, especially under Chapter 11 and Chapter 7 proceedings. The Bankruptcy Code allows the debtor or trustee to decide whether to assume or reject an executory contract as part of the reorganization or liquidation process.

  • Assumption: The debtor commits to fulfilling all obligations under the contract, including curing any existing defaults and demonstrating the financial ability to continue performing. This option is usually chosen when the contract benefits the bankruptcy estate.
  • Rejection: The debtor terminates the contract, effectively treating the other party’s claim as an unsecured debt. This option is used for contracts that are financially burdensome or unnecessary for reorganization.
  • Assignment: In some cases, the debtor may assume the contract and assign it to another party, such as a buyer of the debtor’s assets, provided that party can meet the contractual obligations.

Special rules apply to certain executory contracts — for example, non-residential real property leases must be assumed or rejected within 60 days of the bankruptcy filing, unless the court grants an extension. This decision can have significant consequences, particularly for landlords, franchisees, or service providers relying on ongoing performance.

Issues You Can Face with an Executory Contract

Businesses that have an ongoing agreement with a debtor could deal with issues pertaining to prepetition executory contracts with the debtor. The Bankruptcy Code authorizes debtors to assume or reject contracts for bankruptcy, meaning they have the ability to retain contracts that are beneficial and abandon contracts that are burdensome.  

The majority of courts will define an executory contract as an agreement where both parties need to complete unperformed obligations. If either party fails to meet these obligations, then it would constitute a material breach, which excuses the performance of the other. 

Before anyone signs an executory contract, they need to read and thoroughly understand all terms and obligations contained in the contract. The terms and other legal jargon in such a contract can be confusing. You should talk to an experienced attorney in cases where you're having trouble understanding the intent of the contract. You don't want to enter into a contract that you don't understand or are unwilling to fulfill.

Key Risks and Legal Considerations

While executory contracts offer flexibility and structure for long-term arrangements, they also introduce several potential legal risks and challenges:

  1. Default and Breach of Obligations: Because both parties have ongoing duties, a failure by either side can lead to a material breach. Remedies may include damages, termination, or specific performance.
  2. Bankruptcy and Contract Termination: If one party files for bankruptcy, the executory contract might be rejected, leaving the non-debtor with only an unsecured claim, which often results in minimal recovery.
  3. Complex Terms and Ambiguities: Many executory contracts involve detailed conditions, milestones, or performance metrics. Misunderstanding these terms can result in disputes or unintended liability.
  4. Unequal Bargaining Power: Particularly in lease-to-own and installment sale scenarios, one party (often the buyer or tenant) may bear greater risk if the contract is terminated before completion.
  5. Regulatory Compliance: Certain types of executory contracts, especially those involving real estate or consumer transactions, may be subject to additional legal requirements under state or federal law.

To mitigate these risks, parties should thoroughly review contract terms, negotiate clear performance obligations, and consider including provisions addressing default, termination, and dispute resolution. Engaging a qualified attorney to draft or review an executory contract can significantly reduce exposure to legal complications.

Frequently Asked Questions

  1. What makes a contract "executory"?
    A contract is executory if both parties still have substantial obligations to perform. If either party’s duties are fully completed, the agreement is no longer considered executory.
  2. Can an executory contract be terminated early?
    Yes. Most contracts include provisions for early termination under specific conditions, such as breach, mutual agreement, or bankruptcy rejection.
  3. What happens if a party breaches an executory contract?
    A breach typically allows the non-breaching party to seek legal remedies, including damages, termination, or specific performance, depending on the contract terms and governing law.
  4. How do executory contracts affect bankruptcy cases?
    The debtor can assume (continue), reject (terminate), or assign the contract. Rejection often converts the other party’s claim into unsecured debt.
  5. Are lease-to-own property agreements considered executory contracts?
    Yes. These agreements require ongoing performance by both parties — regular payments from the buyer and eventual property transfer from the seller — making them classic examples of executory contracts.

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