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File photo of RioCan CEO Edward Sonshine.Kevin Van Paassen/The Globe and Mail

The largest landlord of insolvent Target Canada is in talks with its U.S. parent to try to collect what could be hundreds of millions of dollars of lost rent and other store costs as a result of the retailer's abrupt closing.

RioCan Real Estate Investment Trust holds almost half the leases that Target failed to find alternative retailers for, but for which it provided indemnities – or guarantees – to the landlords to cover their losses. RioCan will move to sue the U.S. retailer later this year if the negotiations are unsuccessful, Edward Sonshine, chief executive officer of RioCan, said on Friday.

Target "has not denied liability," Mr. Sonshine said in an interview. "They've made offers – just none that has tickled our fancy yet."

Battle lines are beginning to form between landlords with vacant-store lease guarantees and parent Target Corp. of Minneapolis over payments for property owners' losses tied to the retailer's failure in Canada.

Already RioCan and other landlords are fighting Target Canada in court in its insolvency proceedings, trying along with other creditors to get their hands on more than $1.9-billion of intercompany Target claims. Now the landlords' lease guarantees threaten to become another point of contention in the retailer's massive unravelling in this country.

Michael Smith, an analyst at RBC Dominion Securities, said Target is not paying rent to RioCan on its 19 disclaimed leases despite its obligation under the indemnities to do so.

"We believe Target is not paying rent in an effort to augment its negotiating position for final settlement of all claims" in the retailer's insolvency, Mr. Smith said.

Mr. Sonshine agreed. "I wouldn't if I were them either," he said of Target's failure to pay rents since July 1 in spite of its guarantees, which are not part of the insolvency proceedings. "I mean, why give away a negotiating strength?"

Mr. Sonshine added that in RioCan's talks with Target, "there is a fair amount of room for discussion over how much and when and how to pay."

Target Canada got court protection from creditors in January, closing all of its 133 stores and owing at least $2.2-billion. Landlords of 44 leases for which Target was unable to find a buyer – and that were returned to their property owners – have guarantees from the U.S. parent, according to court filings.

Mr. Sonshine estimated that Target could owe RioCan as much as $250-million just for rent obligations on its indemnified leases, if the landlord weren't able to fill the vacancies.

Nevertheless, RioCan executives said they expect that within two years they will find alternative retailers for the spaces. However, the process will take time and money, especially because most of the stores are too big for one retailer and will have to be split up and rebuilt.

RioCan will argue that Target should be liable not just for rents and taxes but also for the landlord's costs of refitting the vacant stores for future tenants, Mr. Sonshine said. "Are they responsible?" he asked. "I certainly believe they are, and they may even agree, for the costs of putting that new tenant in."

He said it could cost at least $10-million to revamp each store for new tenants while RioCan could lose $18.5-million a year in rent and taxes.

Jay Swartz, a lawyer for Target Corp., said earlier this week the retailer plans to honour its guarantees but the fight will be over the extent of how much each landlord should be paid.

The jockeying over lease payments came as RioCan released its second-quarter results, which showed a weaker profit from a year earlier. Its profit fell to $86-million or 26 cents a unit from $159-million or 51 cents a unit a year ago. The real estate giant said it made $322-million in consolidated revenue in the quarter ended June 30, up from $303-million a year earlier.

Committed occupancy for its 338 income properties and 15 properties under development was 93.9 per cent in the quarter, down from 96.9 per cent last year.

RioCan also said it is looking at "strategic alternatives" for its U.S. operations, which is often code for considering selling a business.

The review, which involves RioCan hiring Morgan Stanley and RBC Dominion Securities Inc. as advisers, comes at a time when the U.S. economy is stronger than that in Canada.

But these types of decisions are made for the long term when the economies in each country could be different, Mr. Sonshine told an analyst conference call. He said RioCan, the country's largest real estate investment trust, is moving more into urban markets where much of the future retail development growth is expected to be focused. In the United States, RioCan doesn't have the infrastructure to move in this direction, as it does in Canada, he said.

"We believe in Canada," Mr. Sonshine said. "Sure, it's soft right now but who knows what it will be in three years."