Insider Lease Agreements: When Smart Structuring Crosses the Ethical Line

In real estate-based businesses, it is common to separate the operating company from the property-owning entity. For example, a retailer may form one entity to run the stores and another to hold title to the real estate. The operating company then signs a lease with the affiliated property owner. On paper, the structure makes sense. It can reduce taxable income, provide liability insulation, simplify financing, and create flexibility for investors.

In healthy times, no one questions it. But when financial distress emerges and a bankruptcy filing follows, insider lease arrangements suddenly move to center stage. Independent appraisals, fairness opinions, and documented board deliberations can demonstrate that insiders acted appropriately. Without those safeguards, even economically reasonable transactions may appear tainted in the light of bankruptcy.

Ultimately, and in these cases, the real issue often becomes what David Levy of Keen-Summit Capital Partners LLC  describes as questions of documentation and performance: “Is there a bona fide lease in place that a tenant is performing under?”

Defining ‘Insider’

The term ‘insider’ is defined in the Bankruptcy Code as:

(A) if the debtor is an individual— (i) relative of the debtor or of a general partner of the debtor; (ii) partnership in which the debtor is a general partner; (iii) general partner of the debtor; or (iv) corporation of which the debtor is a director, officer, or person in control; (B) if the debtor is a corporation— (i) director of the debtor; (ii) officer of the debtor; (iii) person in control of the debtor; (iv) partnership in which the debtor is a general partner; (v) general partner of the debtor; or (vi) relative of a general partner, director, officer, or person in control of the debtor; (C) if the debtor is a partnership— (i) general partner in the debtor; (ii) relative of a general partner in, general partner of, or person in control of the debtor; (iii) partnership in which the debtor is a general partner; (iv) general partner of the debtor; or (v) person in control of the debtor; (D) if the debtor is a municipality, elected official of the debtor or relative of an elected official of the debtor; (E) affiliate, or insider of an affiliate as if such affiliate were the debtor; and (F) managing agent of the debtor.

It is important to note that courts also recognize non‑statutory insiders. Judges examine closeness, control, and similarity to statutory categories. Ultimately substance will prevail over form. A relationship that allows meaningful influence over corporate decisions may trigger insider treatment even if the paperwork says otherwise.

Why Leases Matter So Much in Bankruptcy

Leases are powerful tools in Chapter 11 cases. Under Section 365 of the Bankruptcy Code, a debtor may assume, assign, or reject an executory contract or unexpired lease.

A below‑market lease may be valuable and assignable for consideration. An above‑market lease may be rejected to facilitate restructuring. In this way leases can be either an asset or a liability, notes Biff Ruttenberg of Atlas Partners, LLC.  That flexibility can determine whether a reorganization succeeds or fails.

But when the landlord is an affiliate, courts will apply added scrutiny.

Consider a distressed retailer pressured by its secured lender to sell real estate and reduce debt. Some properties are sold to third parties. Others are sold to insider‑controlled entities at below fair market value, with the debtor leasing them back at market rent. If insiders buy property cheaply yet impose full rent obligations on the debtor, they may be shifting value away from creditors and toward themselves.

Ethical Considerations

In bankruptcy cases, ethical considerations in particular go beyond technical compliance. Courts are not limited to checking statutory boxes and can examine fairness, transparency, and process. And when an insider is involved, transactions within a case will be subject to additional scrutiny.

For directors and officers, their duties of care and loyalty effectively extend to creditors. Failure to solicit third‑party bids, ignoring higher offers, or structuring deals primarily for insider benefit can constitute breaches of fiduciary duty.

Process here is critical notes Samantha Ruben of Dentons.

For attorneys, insider transactions can create professional responsibility risks, which is why it is critical to maintain ‘disinterestedness ’ as defined in Section 327 of the Bankruptcy Code and to be fully cognizant of the ABA Model Rules of Professional Conduct and how they may apply to future situations and clients.

For example, Matt Christensen of Amplēo cautions that if counsel helps structure an insider deal and later represents one party in litigation arising from that deal, that is a very clear violation of conflict rules.

Practical Takeaways

Companies can reduce risk by adopting practical safeguards including:

• Engaging independent counsel for affiliated entities.
• Obtaining third‑party appraisals and rent studies.
• Conducting meaningful marketing efforts.
• Documenting board deliberations thoroughly.
• Disclosing insider relationships fully and early.

These steps not only strengthen the legal record but also reinforce credibility before the court.

Insider lease agreements are not inherently improper. They are common in commercial real estate and often serve legitimate business goals. But once financial distress arises, the scrutiny intensifies.

In bankruptcy court, transactions are judged not only by statutes and case law, but by fairness, transparency, and process. When insider leases withstand that scrutiny, they can remain intact. When they fail, they may be unwound with significant consequences.

To learn more about this topic view Ethical Issues in Real Estate-Based Bankruptcies / Insider Lease Agreements. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested to read other articles about business law and litigation.

This article was originally published on March 9, 2026.

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