Assigning a sublease in a bankruptcy where the landlord opposes?

1000608190 Ontario Inc. v. Zeifman Partners Inc.
Can a trustee in bankruptcy assign a sublease where the landlord opposes?

Summary: In this case, the Court considered whether a trustee in bankruptcy could assign a sublease, which was the debtor’s sole asset, over the objections of the landlord and tenant. The debtor operated a Pita Lite franchise prior to its bankruptcy. On its bankruptcy, the trustee disclaimed the franchise agreement. The sublease was a schedule to the franchise agreement, but the trustee took the position that the sublease remained an independent and enforceable property right notwithstanding the disclaimer of the franchise agreement. The trustee then entered into an agreement with a proposed new subtenant, which intended to operate an Indian restaurant on the property.

The Court disagreed with the trustee, finding that the agreements operated together — the sublease agreement only continued so long as the franchise agreement was in place. In addition, the proposed assignee intended to operate an Indian restaurant on the leased premises, while the contractual framework was clearly set up for a Pita Lite franchisee. As a result, the Court determined that it would not be appropriate to order the assignment of the sublease.

The Trustee in Bankruptcy for 1000608190 Ontario Inc. sought directions from the Court under s. 34(1) of the Bankruptcy and Insolvency Act in connection with a Sublease Agreement it wanted to assign. Following the debtor’s bankruptcy, the Trustee identified the sublease as the sole asset of the debtor’s estate with value. Both the landlord and the tenant took the position that the Sublease Agreement could not be assigned as contemplated by the Trustee.

The contractual framework established by the various parties was set up to support a Pita Lite franchise. The debtor had carried on a Pita Lite franchise on the leased premises pursuant to a Franchise Agreement. The Sublease Agreement was a schedule to the Franchise Agreement, which had been disclaimed by the Trustee in March 2025.

On April 17, 2025, the Trustee executed an agreement of purchase and sale with a third-party purchaser for $180,000 (the “Proposed Assignee”). The Proposed Assignee did not intend to operate a Pita Lite franchise, but rather, an Indian restaurant.

The Trustee pointed to section 3(f) of the Sublease Agreement to support its position that it may assign the Sublease Agreement. That section provided that any assignment of the Sublease Agreement was subject to the tenant’s consent, and the assignee also assuming the Franchise Agreement. The tenant did not consent to the assignment and the Franchise Agreement was previously disclaimed. The Trustee submitted that even after the disclaimer of the Franchise Agreement, the Sublease Agreement remained an independent and enforceable property right.

The Court found that even in the absence of the disclaimer of the Franchise Agreement, the Franchise Agreement had been terminated automatically when the franchisee (the bankrupt) committed an act of bankruptcy, and/or ceased to operate the franchised business. Both the Franchise Agreement and the Sublease Agreement referenced the other and appeared to operate together. In other words, the Sublease Agreement only continued so long as the Franchise Agreement was in place. The Sublease Agreement was terminated when the Franchise Agreement was terminated or when it was disclaimed.

The Proposed Assignee did not intend to operate a Pita Lite franchise on the leased premises. The lease between the landlord and the tenant provided that the tenant had the right to sublet to a bona fide trained franchisee of the tenant upon first obtaining the landlord’s consent. The landlord’s consent was needed for the tenant to sublet the leased premises, and the landlord had not provided its consent.

Section 84.1(1) of the BIA is the section that would permit a court to order the assignment of an agreement to which the bankrupt was a party. In making the determination as to whether it is appropriate to make such an order, the court is required to consider certain factors under section 84.1(4), including (b) whether it is appropriate to assign the rights and obligations to the proposed assignee.

Here, where the contractual framework was clearly set up for a Pita Lite franchisee and given the existence of the other exclusivity covenants related to the proposed Indian restaurant, it would not be appropriate to assign the rights and obligations to the Proposed Assignee.

Judge: Justice Steele

Professionals involved:

• Catherine Francis of Fogler Rubinoff for Morguard

• Lara Di Genova of Blaney McMurtry for Pita Lite Corp. and Pita Lite Franchise Corp.

• Divi Dev of Divi Distressed Investments for Zeifman Partners as bankruptcy trustee