Gap, Winners seek rent breaks in wake of Target exit

Just as landlords finalized a debt recovery deal with failed retailer Target Canada, another wrinkle has emerged.

Two major U.S.-owned retail tenants – TJX Cos. Inc., which owns Winners, HomeSense and Marshalls, and Gap Inc., which also owns Old Navy and Banana Republic – want retailers to be able to invoke their so-called co-tenancy rights to get rent breaks and even permission to leave a mall without a penalty as a result of Target's closing.

The co-tenancy battle, which affects big retailers in situations where a key anchor tenant – Target, in this case – shuts down, could have wider implications for former Target landlords, pinching their financial results even further.

TJX, which has Gap's support, is scheduled to ask the Ontario Superior Court on Monday to allow retail tenants in malls and other properties with an empty Target to be allowed to exercise their co-tenancy rights. Those rights have been put on hold during Target's insolvency proceedings.

"I'm aware of a number of large retailers who have these rights," John Birch, lawyer for TJX, said in an interview.

Target Canada landlords already have suffered as a result of it shutting all 133 of its stores last year, leaving many of the outlets vacant and often giving property owners less bargaining clout in trying to get attractive rents for stores they do re-lease.

Now the landlords face major tenants such as Winners that are seeking financial relief from mall owners or even the green light to exit malls in the wake of Target's collapse.

Co-tenancy rights allow retailers such as Winners and Gap to get rent reductions or leave a mall when an anchor tenant flounders, on the grounds that the closing results in fewer visitors coming to a mall, thus hurting co-tenants' business.

Target Canada got court protection from creditors almost 14 months ago and closed all its stores by mid-April. But the court protection order prevented other retailers from exercising their co-tenancy rights.

In court filings this week, TJX – backed by Gap – says retailers should be able to invoke their co-tenancy rights because Target has closed its stores. And they say landlords should not require that retailers delay invoking their co-tenancy rights.

"It's hurting the tenants," Fred Waks, chief executive officer of Trinity Development Group Inc., whose properties did not have a Target store, said in an interview.

"When you have an empty store, there's a void. That affects retail sales. … But it will be pretty devastating for the landlords."

RioCan Real Estate Investment Trust, the largest former landlord of Target, has previously referred to the hit it will take as a result of co-tenancies. In its fourth quarter, RioCan took a $600,000 provision tied to the co-tenancies.

"I think what you will see is we will suffer through a lot of this through the course of most of 2016," Edward Sonshine, chief executive officer of RioCan, told analysts last month. "But as we go into 2017 and the boxes [stores] are retenanted, or other action is taken over the course of 2017, it will largely disappear as a factor."

TJX, with Gap's support, will ask the court whether the "stay" or suspension of tenants' co-tenancy rights in properties in which Target operated is still in effect. If it is, it is asking the court to lift the stay.

The retailer is also seeking clarification about contractual waiting periods for co-tenancy provisions to come into force under Target's insolvency proceedings.

TJX has 13 stores with co-tenancy provisions tied to Target while Gap has 21 locations, according to court documents.

"TJX always intended to assert all available co-tenant rights against its landlords," Jeff Ryckman, senior vice-president of property development, says in a filing. "In good faith, TJX has respected the co-tenancy stay for over 13 months."

"There are no longer any stores, offices or warehouses owned or operated by [Target] in Canada. … In order to avoid any allegation that TJX is in breach of the co-tenancy stay, TJX, with the support of Gap, seeks a declaration confirming that the co-tenancy stay is no longer in effect."

Other landlords affected include Ivanhoé Cambridge and Oxford Properties Group Inc.

Last week, Target confirmed an agreement for its unsecured creditors, including former landlords, that will provide them with between about 66 per cent and 77 per cent of their proven claims. If creditors approve the proposal, Target could emerge from its insolvency proceedings by the summer.