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Some mall landlords are worried about the effect that Target’s liquidation sales will have on their other tenants.BEN NELMS/Reuters

Major landlords of Target Canada have been battling with the U.S. discounter over how it will conduct its liquidation sales, which could steal business from their other mall tenants.

The landlords are worried that Target, which is operating in bankruptcy protection, will flout the terms of some of its leases by bulking up on inventory and widely promoting its going-out-of-business sales – potentially sullying their malls' image and detracting from rival retail tenants.

On Wednesday, Cadillac Fairview Corp., one of Target's key landlords, is slated to ask an Ontario court for assurances that its lease provisions are adhered to in the liquidation, which could begin as early as Thursday. Most of Target's landlords agree with Cadillac Fairview's initiative, said David Bish, a lawyer at Torys LLP who represents Cadillac Fairview.

"We don't take issue with there being a liquidation process," Mr. Bish said in an interview. "It's just a question of what the rules governing the liquidation should be. We think the rules as initially crafted by the company are not proper rules, given the way they impede on landlords."

The landlords are among an array of stakeholders that are in discussions with Target to preserve what they can as the discounter winds down its business in Canada. It got court protection from its creditors on Jan. 15, giving it the green light to close all of its 133 stores by mid-May and let go 17,600 employees.

The landlords, which are preparing for a court-monitored auction of their leases, were in talks with Target on Tuesday to try to resolve the liquidation sales dispute, Mr. Bish said. They could come to an agreement before Wednesday morning's court hearing, he said.

Liquidators sometimes augment their sales with added inventory, to bolster the revenue generated during the liquidation process. They also like to mount big banner signs to flag the sales outside malls, although some leases prevent them from widely publicizing such an event.

"If there's one store liquidating at prices that are extremely low, it's going to pull away business from other tenants and it's going to hurt other tenants," said Alex Arifuzzaman, a partner at retail-real estate specialist InterStratics Consultants. "It's a short-term pain for the other tenants."

He said Target probably wants to hold its biggest liquidation sales at its most popular stores, while closing its other outlets as soon as possible.

The Target liquidators have already agreed to be relatively low profile in the sales process by not posting "going out of business" or "bankruptcy" sale signs, according to court filings. All display and hanging signs used in the sales "shall be professionally produced and hung in a professional manner," Target's filing says.

But Cadillac Fairview argues in a court document this week that Target is asking the court to approve a liquidation process that "contemplates an unlawful, unilateral amendment of the terms of the Cadillac Fairview leases …

"The court is being asked, inappropriately, to rewrite a contract between parties and to bind Cadillac Fairview against its wishes to this new economic bargain going forward," the landlord said.

Cadillac Fairview says Target Canada is a "de facto bankrupt company in all but name only. As a defunct company, Target Canada has no interest in the outcome of the liquidation of its assets. Conversely, Target Canada's landlords collectively have the largest prospective economic interest in the cessation of Target Canada."

At Wednesday's hearing, Cadillac Fairview will also ask the court to essentially wait a week before deciding whether to agree to Target's bid to get a three-month extension – to May 15 – of its protection from creditors. The landlord argues it is "premature" to decide so soon whether the court order should be extended.

If it weren't extended and a bankruptcy ensued, "that same liquidation process would presumably be conducted in the bankruptcy process," it says.