TORONTO – A group of landlords for Hudson's Bay are opposing the transfer of approximately two dozen leases to Ruby Liu, a billionaire from British Columbia. Hudson's Bay, which filed for creditor protection in March, has been in the process of selling leases associated with itself and Saks Canada, reaching an agreement to sell up to 28 locations to Liu.
So far, three leases have been successfully transferred to Liu because they are located in malls that she owns in British Columbia. However, 25 leases are situated in properties owned by various prominent Canadian commercial real estate companies, with landlords of 23 sites opposing the transfer. Several landlords have expressed their concerns in court, stating they have had "very troubled" interactions with Liu, characterized by a lack of productive discussions and meaningful disclosures. Liu maintains that if the court grants her the leases, the landlords will become amenable to her plans for new department stores in their properties.
This disagreement presents a potential obstacle for Hudson's Bay in finalizing the deal with Liu. However, legal experts note that the retailer may have an alternative path to secure the agreement. This path involves amendments to the Companies’ Creditors Arrangement Act, which is Canada's primary insolvency law. These amendments, introduced in 2009, set forth three criteria that courts must assess when deciding whether to assign leases to a new tenant.
The first criterion is whether the sale has the backing of the monitor, which is an independent third party assigned by the court to assist companies navigating creditor protection. In the case of Hudson's Bay, the monitor is Alvarez & Marsal, which has yet to disclose its position on the Liu deal.
The second criterion involves evaluating whether the prospective tenant is suitable, primarily regarding their capability to fulfill tenant obligations and pay rent. While Liu has substantial financial resources, her experience is steeped in real estate ownership rather than leasing, raising questions about her suitability as a tenant.
The third consideration for the court is whether transferring a lease to Liu is "appropriate." Legal experts suggest that this entails evaluating whether the proposed changes to the lease agreement align with what was originally agreed upon, or if they entail significant alterations that would undermine the intentions of the original leases.
Much of the conflict appears to center around these criteria. Analysts warn that a tenant cannot leverage a creditor protection process to compel landlords into renegotiating their leases. Recent correspondence from Liu's lawyer to the landlords indicated her intention to take over the leases on an "as is, where is" basis, but failed to clarify the entertainment and experiences she has previously expressed interest in introducing at her department stores. The extent to which the current leases permit such uses is still undefined.
When a deal is struck, companies typically seek landlord consent because most commercial leases have clauses that require property owner approval before transferring a lease. Landlords often oppose these transfers because if leases remain unsold or unassigned, they revert to the landlords, allowing them to reassess their leasing options and potentially charge higher rents.
Consequently, the Bay has a strong interest in securing the lease transfers to alleviate some of its financial burdens, as it maintains a long list of creditors and obligations. Through liquidation sales and the upcoming sale of its trademarks to Canadian Tire for $30 million, the Bay aims to reduce its debts. Securing the lease transfers to Liu could further aid in stabilizing its financial standing.
The court ultimately decides whether to approve the lease transfers based on the outlined criteria. Landlords are likely to monitor Liu closely to ensure compliance with any terms set forth in the agreements should the leases be assigned to her.
