Operating Under a New Trade Name Wasn’t an Incurable Nonmonetary Breach of Lease

Unless a franchise agreement with a particular franchisor is an integrated part of a shopping center lease, the lessee can assume the lease by operating the same type of business under a new trade name without offense to Section 365(b)(3)(C), for reasons explained in an August 28 opinion by Bankruptcy Judge Luis E. Rivera, II, of Tampa, Fla.

The corporate debtor in chapter 11 operated a premises in a shopping center to sell pet supplies and provide pet grooming services. The “Use” provision of the lease permitted “the following purpose only: The operation of a [original trade name] store with the retail sale of pet supplies and baked goods and food for pets.”

The debtor had rejected the franchise agreement and was operating the store in the same line of business but under a new trade name. The debtor moved to assume the lease under Section 365. The parties agreed there were no monetary defaults. 

The landlord objected to assumption, contending “that the Debtor’s rejection of the Franchise Agreement constitutes an incurable default under the Lease” as required by Section 365(b)(3)(C). The landlord interpreted the lease to mean that the stores in the center must be “predominantly occupied by nationally and regionally recognized retailers.”

For a lease in a “shopping center,” Section 365(b)(3)(C) requires the debtor to provide “adequate assurance” that the 

assumption . . . of such lease is subject to all the provisions thereof, including (but not limited to) provisions such as a radius, location, use, or exclusivity provision, and will not breach any such provision contained in any other lease, financing agreement, or master agreement relating to such shopping center.

The debtor contended that the lease “requires only that it continues to operate the same type of business, i.e., a premium pet food and pet grooming boutique.”

Compliance with the Lease

Judge Rivera began his discussion of the merits by paraphrasing Section 365(b)(3)(C) to mean that the debtor must provide “adequate assurance that assumption will remain subject to all lease provisions and will not disrupt the shopping center’s tenant mix or balance.” He went on to cite the Collier treatise for saying that nonmonetary defaults are incurable “only where the breach is material or has caused substantial economic detriment to the nondebtor party.”

The landlord contended that the lease and the now-rejected franchise agreement were an “integrated transaction.” However, Judge Rivera said that the “Lease contains no indication that it is integrated with the Franchise Agreement.” 

For Judge Rivera, the “dispositive issue is whether [the] reference [in the lease] to the Debtor’s [former] trade name constitutes a material use restriction.” He said it therefore was the landlord’s burden to show “that the Debtor’s continued operation under the [former trade name] is a material obligation under the Lease.” 

Employing that standard, Judge Rivera concluded:

The operative focus of the use covenant is not the Debtor’s trade name or franchise status, but its operation of a retail dog bakery. Nor would a change in the Debtor’s trade name alter its property rights, contractual obligations, or liability for obligations previously incurred.

Judge Rivera went on to say:

The plain language of the Lease does not require that the Leased Premises be occupied by a franchisee, operated under the [former] trade name, or governed by a Franchise Agreement. Accordingly, the Debtor’s use of a different trade name would not deprive the Lessor of any benefit reasonably contemplated by the Lease.

In other words, Judge Rivera was unwilling to “rewrite an unambiguous agreement to supply a term the parties omitted.” He ruled that “neither § 365(b)(3)(C) nor the Lease requires the Debtor to continue operating under the [former] trade name.”

Tenant Mix

Alluding to Section 365(b)(3)(D), the landlord argued that the debtor’s rebranding would offend the shopping center’s tenant mix. The subsection requires the debtor to provide adequate assurance “that assumption or assignment of such lease will not disrupt any tenant mix or balance in such shopping center.”

In the lease, Judge Rivera found “no reference to an intended tenant mix, tenant balance, or master plan for the Shopping Center.” 

Judge Rivera found that the debtor’s operations would “not alter . . . the Shopping Center’s existing tenant array or disrupt any tenant mix or balance cognizable under § 365(b)(3)(D),” because “the Debtor proposes to continue the same retail operations it conducted before the petition date.”

Judge Rivera granted the motion to assume the lease.