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A Gap store is seen in Pittsburgh in this 2017 file photo. Gap Inc. wants to invoke its co-tenancy rights as a result of Sears closing its stores.

Gene J. Puskar/The Associated Press

As many landlords of the failed Sears Canada Inc. struggle to fill the retailer’s empty stores in their malls, the property operators now face another potential headache.

Two major U.S.-owned retail tenants – clothiers Gap Inc., which owns its namesake, Old Navy and Banana Republic, and Children’s Place Inc. – want to be able to invoke their co-tenancy rights, which would allow them to get rent breaks or even leave a mall in some situations as a result of Sears closing its stores.

Those co-tenancy rights were suspended when Sears got court protection from its creditors in June of last year and closed all of its 255 stores by January. The shutdown left many shopping centres across the country with big vacant spaces, giving consumers less reason to visit the malls. Now Gap and Children’s Place want the court to lift the co-tenancy ban so they can essentially try to get financial relief from their landlords.

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The co-tenancy fight, which is expected to be heard in Ontario Superior Court next month, could put more pressure on some landlords who already are scrambling to find new tenants to replace Sears. Other retailers could push to invoke their co-tenancy rights, observers say.

Co-tenancy rights in retailer leases allow chains such as Gap and Children’s Place to get rent reductions or even exit a mall when an anchor tenant – Sears in this case – falters. The provision, whose terms differ from lease to lease, is based on the view that the closing results in fewer shoppers coming to a mall and thus hurts co-tenants’ businesses.

Gap and Children’s Place argue the temporary ban on co-tenancy rights during Sears’s insolvency proceedings should be lifted because the Sears leases have been sold or handed back to the landlords, according to court documents filed this month. They say the suspension of the rights no longer provides a benefit for Sears.

“Gap has always intended to assert all available co-tenancy rights against its landlords in the cases of co-tenancy failures," Matthew Irwin, associate general counsel for Gap in San Francisco, said in a sworn statement filed in court this month.

The Sears closings came at a difficult time for many landlords that were already grappling with the shutdowns of a string of other failed retailers, including Target Canada. The U.S.-based discount chain got court protection from its creditors in January of 2015, shutting all 133 of its stores here and leaving vacancies in malls.

James Smerdon, vice-president of retail consulting at real estate specialist Colliers, said other retailers probably are looking at invoking co-tenancy rights in the Sears case as well. But he added any move by Gap and Children’s Place to invoke their co-tenancy clauses as a result of Sears closures “will be seen by landlords as desperate, or worse vindictive and mean-spirited.

“It has probably been a decade or more since Sears generated spin-off traffic that supported the likes of Gap and Children’s Place,” Mr. Smerdon said. “These retailers are likely trying to cut costs as their earnings have been hammered by competition from online retailers as well as hyper-competitive stores like Uniqlo. “

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He and other real estate experts didn’t have an estimate of how many Sears stores are still empty although some are being torn down and redeveloped into other uses such as condominiums while still others are being divided up into multiple stores. As for Target, 27 of its stores – 20 per cent of the total – were still completely vacant as of April, he said.

In Target’s insolvency proceedings, Gap and TJX Cos., another large U.S.-based retailer whose chains include Winners, HomeSense and Marshalls, also fought to overturn a ban on their co-tenancy rights. Ultimately, TJX settled out of court with most of its landlords and withdrew its suspension request, said lawyer Lou Brzezinski of Blaney McMurtry LLP, whose law firm represented some Target creditors (although not those involved with the co-tenancy matter). Gap’s lawyer would not comment.

Mr. Brzezinski, whose firm now represents some Sears creditors, said he expects some landlords will oppose the latest move by Gap and Children’s Place, although none have come forward yet. Lawyers for key landlords involved, such as Ivanhoé Cambridge and OPB Realty, did not comment, nor did one for Children’s Place.

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