Major retail tenants with stores in malls with a former Target outlet are a step closer to lower rents – and even breaking leases – as a result of Target Canada's failure.
Ontario Superior Court on Monday agreed to a request by U.S.-based retailers TJX Cos. (which owns Winners, HomeSense and Marshalls) and Gap Inc. (which also runs Old Navy and Banana Republic) that a temporary ban on retailers being able to invoke their so-called co-tenancy rights be lifted.
Co-tenancy rights allow key retailers to get rent breaks and, in some circumstances, leave a mall or other retail property without penalty, if an "anchor" tenant such as Target closes its store in the premises. The reasoning is that once an anchor retailer goes dark, traffic to a mall declines, hurting co-tenants' business.
Retailers' co-tenancy rights were put on hold during Target's 14-month insolvency proceedings, but Justice Geoffrey Morawetz on Monday agreed to a request from TJX and Gap that the co-tenancy rights no longer be suspended.
However, the judge also agreed to the suggestion from the retailers and landlords that he wait until April 26 to hear more substantive arguments behind the retailers' request. TJX and Gap argue landlords should not require that retailers delay invoking their co-tenancy rights, even though leases have waiting periods to exercise these rights, because Target closed all of its 133 stores by last April. It leaves in question the timing of the co-tenancy provisions kicking in, delaying for landlords the loss of rent payments and, potentially, the loss of some retail tenants in malls and other properties.
RioCan Real Estate Investment Trust, which was the largest landlord of Target Canada, already took a $1-million provision in 2015 for rent reductions tied to the co-tenancies.
Lawyers for RioCan and other landlords argued the insolvency proceedings are an inappropriate forum for the fight over a landlord-tenant issue.
Each retailer's lease has different co-tenancy provisions and timings. Target's insolvency affected 33 landlords and 89 Target leases that were "disclaimed" or handed back to landlords.
"There are many more landlords, many more leases than just the disclaimed ones with basically an interminable number of" co-tenancy provisions, said Jonathan Bell, a lawyer for RioCan. "I'm sure someone here is smart enough to figure out the number but it's massive."
He said the fight over tenants exercising their co-tenancy rights should play out in a different arena, rather than in that of Target's insolvency court proceedings which would be bogged down with hundreds of lease provisions.
Catherine Francis, a lawyer for landlord Primaris REIT, said some of the retailers have co-tenancy rights that would prevent them from being able to exercise those rights in the Target case. For example, one of the leases of her landlord client has a co-tenancy clause that is contingent on both Target and Hudson's Bay leaving the property. "The Bay hasn't closed so it's not even triggered," she said, adding co-tenancies are a private matter between landlord and tenant.
Alan Dryer, a lawyer for Gap, said in an interview he is pleased the court lifted the "stay" or suspension of the co-tenancy rights of Gap and other retailers. He said there could be many other tenants that are affected by the decision.
But it is too early to determine what Gap will do in each of the 21 leases in which it had a co-tenancy provision tied to Target. "It may be subject to further court interpretation." TJX has 13 leases with such clauses.
Co-tenancy provisions rarely emerge in Canada in retail failures because few anchor retailers as big as Target close their stores. In Eaton's insolvency more than 15 years ago, a court prevented mall co-tenants from terminating their leases during the retailer's court restructuring.
U.S. retailers invoke co-tenancy rights more often south of the border and aggressively seek those rights when coming to Canada, said John Crombie, senior vice-president at Triovest Realty Advisors.
Sometimes U.S. retailers use the rights as a way to get out of weaker malls, he said. "It's a matter of survival."
A co-tenancy clause gives a retail tenant the right to end its lease and/or pay reduced rent if a prescribed percentage of the mall becomes vacant, or if one or more anchor tenants fail to open or leave.
Editor's Note: An earlier online version of this article incorrectly attributed the statement in the 11th paragraph to Linda Galessiere. This version has been corrected.