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A workman installs a sign at the Zellers store on Thermos Rd., Toronto in this file photo.Fernando Morales/The Globe and Mail

Hudson's Bay Co. remains saddled with about half of its $226.4-million of Zellers lease obligations that it didn't unload through its deal with U.S. discounter Target Corp., as HBC seeks to settle liabilities with landlords at steep discounts or find new tenants for the space.

According to sources familiar with the situation, HBC is selling its Zellers leases back to landlords for about 30 cents on the dollar and already has negotiated settlements for a number of lease obligations for which it would otherwise have to pay for the next several years before the leases expire.

The talks between HBC and its Zellers landlords come as the retailer prepares to raise $400-million in an initial public offering.

HBC's biggest settlement has been with its largest Zellers landlord, RioCan Real Estate Investment Trust, at about 35 cents on the dollar, sources said. RioCan has said it is receiving a lease termination payment from HBC of $9.3-million for five Zellers stores.

The spaces "surrendered" by Zellers to RioCan "are on their way to being re-leased and will further positively impact organic growth as these stores are re-configured and re-tenanted," Edward Sonshine, chief executive officer of Riocan, told analysts on Tuesday.

Would-be HBC shareholders may be surprised to learn from its public offering filings that Zellers has, on paper, $226.4-million of Zellers lease liabilities for the next four years or more. However, the retailer has taken steps to reduce the payments through its talks with landlords.

HBC struck a $1.8-billion deal in 2011 to sell most of its Zellers leases at its best locations to Target. With its remaining Zellers leases being sold off, HBC's challenge now is to rev up its sales performance.

"Everybody knows that these are legacy issues that they are working through," said Brendan Caldwell, president of Caldwell Investment Management, who is considering buying HBC shares for clients. "That's not likely the stuff that's a killer. It's the unknown unknowns. It's retail sales going forward. It's customers' preferences."

Zellers plans to close its 64 remaining stores by next March when Target will start open its outlets here. Zellers' landlords generally are motivated to buy back the leases, betting they can get a higher rent from another retail tenant. RioCan can potentially double its Zellers rent to $10 a square foot with new tenants, said Neil Downey, real estate analyst at RBC Dominion Securities.

Zellers' rents are generally below market rates, at an estimated $5 a square foot on average and as little as $1 a square foot, compared with a national average for anchor tenants that can run closer to $14.

"In all truthfulness, they haven't been a very good retailer for quite a long time," Don Clow, CEO of Crombie Real Estate Investment Trust, which was left with three unsold Zellers leases, said during a conference call in the summer. "They also don't pay us very much rent. So, for us, we view that as an opportunity ... They're in control of the space, so should they wish to buy out their commitments, we might be receptive to that because we're confident we can redevelop the space in a more productive manner than it's currently utilized."

Mr. Clow said Zellers is paying $2 to $5 a square foot and draws few shoppers.

George Hartman, an investment banker at Maison Placement and former retail analyst, said shareholders had to expect to be saddled with the cost of rents at Zellers' weakest locations. But other matters make HBC's share offering less enticing, particularly the Bay's $133 of sales per square foot, compared with the North American department store average of $240 (U.S.). HBC's Lord & Taylor chain generates $210 sales per square foot. One of HBC's strengths is that it isn't stuck with Zellers, he said.

HBC has reserves that it believes are appropriate for the amount of potential exposure it faces, the sources said.