HBC locked in legal battle with two landlords over unpaid rent

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Hudson’s Bay Co. is battling with two of its major landlords over the retailer’s failure to pay the rent during the novel coronavirus pandemic, alleging that one of them, Oxford Properties, is not doing enough to draw customers to its Quebec malls.

The HBC accusations were filed in Quebec’s Superior Court on Monday in response to a petition from Oxford for a court order to force the retailer to pay the rent at two of its shopping centres: Galeries de la Capitale in Quebec City and Les Promenades in Gatineau. Cominar REIT is also asking the court to order HBC to pay rent at three of its shopping centres in the province. HBC said it plans to file a similar response to Cominar.

The legal wrangling provides a window into how HBC and enclosed malls have fared during the pandemic and shows the struggle between tenants and their landlords during the devastating economic crisis. HBC sales at Galeries and Promenades were down more than 99 per cent in April when the malls were shuttered, and the retailer is still well below prepandemic levels at both locations. Customer traffic at both malls was down about 85 per cent in May compared with last year, but the gap closed to less than 20 per cent by August, according to the HBC court filings.

HBC was already trying to revamp its business before provincial governments required enclosed malls to shut down to slow the spread of the virus. That led to a loss of revenues for HBC, other businesses and their landlords, many of which had to provide rent deferments or abatements.

HBC alleges that Oxford has not fulfilled its contractual lease obligations of delivering a first-class mall in terms of customer traffic and opportunity. The retailer claims that Oxford has not installed touchless operations on doors and bathroom fixtures, or signs to encourage physical distancing.

Oxford said it was forced go to court after months of trying to reach an agreement with HBC on its rent. HBC told Oxford it “should not expect payment of rent,” at any of Oxford’s malls, other than three locations for which HBC had paid, according to Oxford’s legal action filed in late September. Oxford declined to name the three locations.

“HBC continues to ignore multiple requests to enter into a constructive dialogue to find a mutually agreeable arrangement, something we have been successfully able to achieve with its peers and hundreds of other retailers," Oxford spokesman Daniel O’Donnell said, adding that because HBC said it will continue not to pay rent, Oxford had to pursue legal action.

HBC’s monthly rent at Galeries and Promenades is $220,000 and $145,000, respectively, without property taxes. Oxford said the retailer owes $2.28-million for not paying the rent at those locations, according to the court documents.

When asked if Oxford would take legal action against HBC at its other unpaid locations, including starting eviction proceedings, Mr. O’Donnell said: “We are reviewing our options.”

HBC said the allegation that it had refused to pay rent or to negotiate was “completely false,” and that the legal action was filed without warning while HBC and Oxford were still in discussions about the leases. HBC argued that Oxford’s demand that it pay 100 per cent of its rent ignores the change in the properties’ value precipitated by the pandemic.

Both malls were closed from March 22 until June 1, but HBC was able to reopen on May 25 in Gatineau and May 19 in Quebec City because the stores had street-facing entrances. However, sales in both malls have been “well down in June through September,” and both stores are unprofitable, according to an affidavit filed with HBC’s response. For example, Galeries’ September sales were 40 per cent below the same month in 2019, and Promenades was down 29 per cent over the same time period, the HBC filing said.

“Sales are not trending upwards. To the contrary, things are getting worse rather than better,” Ian Putnam, president and chief executive officer of HBC Properties and Investments, said in another affidavit. “While the drop in sales has been significant, the drop in profitability is even larger."

Oxford said in its filing that after a cheque from HBC for April rent was returned for insufficient funds, the landlord sent a notice of default to HBC and asked the retailer to provide financial information so they could negotiate rent relief. HBC disputes that the cheque bounced, saying that it stopped payment on the April rent cheque when stores closed down. On Sept. 4, HBC told Oxford it was in breach of its contracts by not addressing the pandemic’s impact on its malls, relieving HBC of the obligation to pay rent.

Editor’s note: This story has been updated to clarify the nature of the dispute over HBC’s April rent cheque.

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