With their store leases up for grabs, major Target Canada landlords are suggesting the insolvent discounter be pushed into all-out bankruptcy as a way to remove the retailer from controlling the lease sales and other wind-down proceedings.
The landlords' Target leases could fetch $1.8-billion to $2-billion, according to one analyst. But under the current court-monitored insolvency process, the auctioning of their leases is essentially being run by the departing retailer.
The landlords say switching to a bankruptcy – under the Bankruptcy and Insolvency Act – would mean a third-party trustee who acts on behalf of creditors would oversee the winding down and liquidation. The BIA would provide deadlines for the disposition and more certainty to the process, cutting costs and time, they say. Instead, Target, which is under court protection from creditors, is in the driver's seat and looking at a 45-day extension of the lease sale process.
Landlords feel the urgency to rapidly get alternative tenants in place at their soon-to-be-abandoned Target store locations. The property owners had counted on Target to act as an anchor tenant in their malls to draw more shoppers and business.
"If a Target store is sitting vacant, even if someone is paying rent for it, it hurts the shopping centre and all the other tenants," said Richard Orzy, a lawyer at Bennett Jones LLP who represents landlords RioCan Real Estate Investment Trust and Kingsett Capital Inc.
On Jan. 15, Target Canada unexpectedly got court protection under the Companies' Creditors Arrangement Act, saying it would leave the country after just about two years and $7 billion of investments. By May 15, and in many cases sooner, its U.S. parent Target Corp. will close its 133 stores here and let go its 17,600 employees.
On Wednesday, Target and its landlords are set to face off in Ontario Superior Court over the lease sale process. Landlords have been locked in talks with the retailer; they could come to a resolution before Wednesday's hearing.
Target Canada counters a court-supervised CCAA proceeding "provides the best opportunity to maximize value for all of the company's stakeholders," Tracy Sandler, lawyer at Osler Hoskin & Harcourt LLP which represents Target, said in an e-mail.
"It provides the company with the necessary flexibility to deal with all of its assets, including its real estate assets, in a controlled and orderly manner," she said. "... A bankruptcy proceeding, at the behest of certain landlords, could have significant negative consequences to other stakeholders of Target Canada."
Landlords feel the pressure to move quickly. "Landlords are essentially powerless in this process," CIBC World Markets analyst Perry Caicco said last month, estimating the leases could fetch $1.8- to $2-billion. "Target can sell these to the highest bidders."
The landlords argue the bankruptcy act provides more certainty about the outcome by setting time limits for lease sales. In Ontario, for example, the properties have to be sold or returned to the landlords generally within three months of the filing.
"There is no compelling reason why Target Canada should remain in charge of its liquidation process," RioCan and Kingsett say in a court filing.
Many suppliers would support the landlords in their bid to shift the proceedings to a bankruptcy, said Lou Brzezinski, a lawyer at Blaney McMurtry LLP who represents major vendors such as PepsiCo Canada and Nintendo Canada.
Suppliers prefer the bankruptcy act because it gives them the right to ask to get back their goods that were shipped in the 30 days before the retailer's filing. But those rights don't exist under the CCAA. Vendors have said Target stepped up its merchandise orders in that 30-day period.
"Clearly if a bankruptcy order is made then these 30 day rights would crystallize," Mr. Brzezinski said.
Mr. Brzezinski's clients want the proceeds from the sale of their 30-day goods to be held in a separate trust account rather than actually repossessing them, "which would disrupt the orderly liquidation," he said. Target started its liquidation sales last Thursday.
Both landlords and suppliers suggest the bankruptcy act is more appropriate for a retailer that is shutting down rather than the CCAA, which is aimed at helping companies restructure and carry on business.
Target initially had said it would complete the lease sales by May 15. But late last Tuesday, the retailer said the process could take another 45 days, until June 30 or even later, which "is far too long," RioCan and Kingsett say in a court document.
If the proceedings remain under the CCAA, the court-appointed monitor should control the sale of the leases, they add.