Executory Contracts: Obligations Still Outstanding
What Is an Executory Contract?
An executory contract is one in which both parties have significant obligations still remaining to be performed. The contract has been signed and is binding, but neither party has fully completed their side of the deal yet.
By contrast, an executed contract is one in which all parties have fully performed their obligations.
The Spectrum from Executory to Executed
Most contracts start as fully executory and gradually become executed as obligations are fulfilled:
- Fully executory. A new two-year office lease: the landlord must provide the space for 24 months, and the tenant must pay rent for 24 months.
- Partially executed. Six months into the lease: both parties have performed six months' worth of obligations, with 18 months remaining.
- Fully executed. The lease ends: both parties have fulfilled all obligations.
Why the Executory Distinction Matters
Bankruptcy. Under 11 U.S.C. Section 365, a debtor in bankruptcy can assume or reject executory contracts. This is one of the most powerful tools in bankruptcy proceedings:
- Assume: Keep the contract and continue performing (or assign it to a third party).
- Reject: Walk away from the contract, treating the rejection as a breach. The non-debtor party gets an unsecured claim for damages.
This power applies only to executory contracts — those with material obligations remaining on both sides.
Real estate. In some states, a buyer under an executory land contract (contract for deed) has fewer protections than one who holds legal title. If the buyer defaults, the seller may have easier remedies.
Tax treatment. The timing of income and expense recognition can depend on whether a contract is executory or executed.
Common Examples
- Employment agreements (ongoing work for ongoing pay)
- Lease agreements (ongoing occupancy for ongoing rent)
- Supply agreements (ongoing delivery for ongoing payment)
- Licensing agreements (ongoing rights for ongoing royalties)
- Construction contracts (ongoing work before completion)
What to Watch For
- Counterparty bankruptcy risk. If the other party files for bankruptcy, your executory contract may be assumed, rejected, or assigned to a third party without your consent.
- Land contracts. Buyers under executory land contracts (installment sales) may have fewer foreclosure protections than mortgage borrowers in some states.
When to Consult a Lawyer
Consider consulting an attorney if a counterparty to your executory contract has filed for bankruptcy or appears to be in financial distress, or if you are considering entering into an executory land contract.
This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.