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Shoppers pass by Hudson's Bay Company's department store windows in Toronto, June 10, 2020.

Cole Burston/COLE BURSTON/THE GLOBE AND MAIL

Landlords are facing a tricky situation with their Hudson’s Bay Co. leases, as the fallout of any eviction of the retailer over unpaid rent could have a ripple effect on the rest of the mall and exacerbate already tough retail conditions from the pandemic.

HBC, the country’s oldest retailer, has withheld rent at more than 20 locations across the country, according to court documents and landlords.

Some of the biggest landlords – Oxford Properties, Morguard REIT, SmartCentres REIT and Cominar REIT – have taken HBC to court for months of unpaid rent. Some are seeking to evict HBC, while others have not explicitly asked the courts to kick the retailer out.

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Part of the dilemma for landlords is that HBC is usually one of the anchor tenants, which means it takes up a significant amount of space in their shopping centres and is expected to attract customers.

Smaller retailers that line the corridors leading to the anchor tenant can have co-tenancy leases, which tie their lease obligations to the presence of an anchor tenant. If the anchor tenant disappears, those with co-tenancy leases could get out of their lease obligations. Customers are less likely to walk down a corridor to an empty space, curbing foot traffic to retailers closest to the anchor tenant.

“If there is a dead end or the anchor tenant is dead, no one is going to walk down there and it slowly cuts off the lifeblood of the mall,” said Roelof van Dijk, lead researcher in Canada for Colliers International, a commercial real estate firm.

Historically, that is why HBC and other department store chains obtained preferable lease terms for acting as anchor tenants. However, HBC may no longer be the draw it once was, as it has suffered from increased online competition and changing consumer behaviour. It had been trying to turn its operations around even before the start of the pandemic, which has hurt malls and put many fashion retailers out of business.

HBC, which operates the Hudson’s Bay, Saks Fifth Avenue and Saks Off Fifth department store chains, is facing at least 22 lawsuits for unpaid rent in Ontario, Quebec, B.C. and Florida.

HBC has repeatedly said the burden posed by the pandemic should be shared fairly by both landlords and retailers, and it has taken the unusual step of suing landlords and alleging they are breaching the terms of the leases because the malls are unsafe. The retailer has responded to lawsuits with similar allegations of poorly run malls and insufficient pandemic measures – accusations that third-party real estate experts call questionable.

Another issue for landlords is the huge amount of space that HBC uses. Landlords were saddled with large amounts of space to fill when big-box store Target and the Sears department store chain closed in Canada in 2015 and 2017 respectively.

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“The cost involved in re-leasing that space and the time involved and the municipal procedures that you have to go through. Sometimes you need a whole new site plan agreement because you will have to punch out windows. It is a process,” said Ed Sonshine, founder and chief executive officer of RioCan REIT, one of the country’s largest property owners. “We went through it with Target and Sears and by the time you get it all done, it is two to three years and that is assuming the tenants are there to fill up the space.”

Even though HBC has withheld rent payments, the fact that the retailer is in a multitude of locations gives it some leverage over its landlords.

But Mr. Sonshine said that, sooner or later, the retailer would have to pay.

In some of the first court rulings on lease obligations during the pandemic, HBC has been ordered to pay part of its rent. A Quebec court is expected to make a decision soon on landlord requests to order HBC to pay rent in five locations.

HBC and RioCan have a real estate partnership or joint venture on some of HBC’s locations, including the retailer’s main store in Vancouver. Mr. Sonshine said HBC was paying the joint venture.

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