‘WE’RE NOT NEIMAN MARCUS WE’RE NOT J.C. PENNEY WE’RE NOT LE CHÂTEAU’
HBC HAS FOUGHT ITS LANDLORDS OVER UNPAID RENT AND THE GOVERNMENT OVER LOCKDOWNS. BUT IT INSISTS IT ISN’T GOING ANYWHERE, DESPITE THE PANDEMIC’S HIT
toronto • As the key Christmas shopping season was kicking off, Hudson’s Bay Co. ULC found itself shut out of a mall in Coquitlam, B.C. It turned out that the retailer hadn’t paid rent in months and the landlord opted to lock the doors to the store in the middle of the night.
The dispute between HBC and the landlord in late November was not an isolated one. Property firms behind prominent shopping malls in North America have fought several high-profile court battles in recent months against the department store chain, looking to claim rent arrears that total in the millions of dollars when added all together.
The resulting attention to the unpaid rent didn’t exactly inspire confidence that HBC was on sound financial footing, something the 350-year-old company is all too aware of. In a lawsuit filed to regain access to its store at the Coquitlam Centre Mall, the retailer told the Supreme Court of British Columbia that its reputation was on the line.
“Hudson’s Bay’s evidence is that this state of affairs may signal to the world that it is in severe financial difficulty, something that Hudson’s Bay denies,” Justice Shelley Fitzpatrick wrote in an interim decision.
The judge agreed with HBC, and ordered the landlord to allow HBC back into its store. But Fitzpatrick also ordered HBC to repay half of the hundreds of thousands of dollars in arrears and half its rent going forward until “a more fulsome hearing” could be held.
Judges in other cases, including ones in Ontario and Quebec, have given similar interim orders for HBC to pay some of what it owes, at least until the cases can be heard on their merits.
In the meantime, landlords, industry watchers and consumers are left to wonder whether HBC is actually in “severe financial difficulty,” or, as the company suggests, it’s only been made to look that way.
Ian Putnam, one of HBC’S top executives, is clear on this point: Canada’s oldest and most storied department store chain will survive.
“We’re not a distressed retailer,” the chief executive of HBC’S property development arm said in December. “There is no doubt that Hudson’s Bay emerges at the end of this pandemic as a strong retailer and will continue for another 350 years or more.”
This latest legal drama, he said, isn’t about a retailer that can’t pay its rent. It can. Instead, HBC believes it’s a story about a major department store chain fighting for a fair deal on rent during a pandemic, only to be unjustly cast as another downward-spiralling retailer headed for the same demise as some of its one-time competitors.
Many in the industry, including HBC’S owners, were aware the company was in a challenging position before the pandemic, with its new ownership already in the middle of a needed, but potentially painful transformation, including asset sales, of the business after years of stagnation. The pandemic, and the resulting shutdowns and restrictions on non-essential businesses, has only made that challenge harder.
Some other well-known brands have already been pushed into bankruptcy protection: Aldo Group Inc., Le Château Inc. and reitmans (Canada) Ltd. in Canada, as well as Neiman Marcus Group Inc. and J.C. Penney Co. Inc. in the united States.
But Putnam said HBC has only withheld rents while it tries to negotiate fairer deals with landlords, an effort to get the property firms to shoulder some of the pain of the pandemic.
“you mentioned Neiman Marcus — we’re not Neiman Marcus. We’re not J.C. Penney. We’re not Le Château,” Putnam said. “The world can’t paint every retailer or every department store with the same brush.”
Some, however, disagree. One executive at a major Canadian commercial landlord, who has been involved in negotiations with HBC, said the retailer’s refusal to pay rent has stoked concerns about its future.
“When you don’t pay rent, you’re signalling to the market that you’re not afraid to lose stores,” said the executive, who spoke on condition of anonymity because of not being authorized to speak publicly on the matter. “When you’re selling off your assets? Not a good sign.”
HBC, however, said unlocking value from its real estate assets has long been part of the company’s strategic plan.
Monique Jilesen, an insolvency and restructuring lawyer at Lenczner Slaght royce Smith Griffin LLP in Toronto, said there’s “no surefire way of predicting” whether a company is on its way to insolvency, particularly in the middle of the pandemic.
For one thing, lenders are currently more inclined to be lenient since so many businesses are in the same difficult position.
In general, though, a troubled company will try to do one of two things: “reduce its expenses, or raise cash in some way,” she said, adding that she could not comment directly on HBC. “It’s still ultimately about: do you have enough money to pay your debts as they become due?”
Putnam said HBC “absolutely” has the money to pay its rent, and is merely trying to come to more reasonable agreements with landlords.
But Oxford Properties Group, the shopping centre operator owned by the Ontario Municipal Employees retirement System (OMERS) pension fund, said it was “egregious” that HBC declined to pay its rent for months when, according to Putnam, it had the liquidity to do so.
Other retailers have managed to pay some portion of their rent “while HBC elected to wash its hands of them entirely,” Oxford spokesman daniel O’donnell said in an email.
Oxford said it sued HBC this fall, after eight months of “disingenuous” negotiations on HBC’S part.
“HBC’S explicit decision not to pay any rent since March was taken just a few weeks after the company was privatized and restructured so its ultimate parent company is no longer a Canadian company and now located offshore,” O’donnell said, citing media coverage of HBC’S ownership being transferred to a Bermuda-based holdings company.
“We now call on HBC, and directly to its New yorkbased private-equity owners, to honour its obligations and pay rent across Canada just as thousands of other retailers continue to do.”
But in court filings, HBC accused Oxford of being the unreasonable one.
“discussions occurred for months before the Landlords suddenly went silent and then refused to enter into any reasonable resolution to the dispute,” HBC said in a lawsuit against Oxford, filed with the Ontario Superior Court.
Putnam said HBC has agreed “to a fair sharing of the burdens of the pandemic with every single one” of Oxford’s peers.
“Oxford is still not willing to carry their fair share and, as such, we are happy to have the courts determine what is fair and reasonable and have confidence in its ability to arrive at a just result,” Putnam said in an emailed follow-up statement, which also stressed that “HBC is a Canadian company.”
In HBC’S court filings, it has argued that it is within its rights to withhold rent, since its landlords have failed to provide “suitable premises” during the pandemic, with foot traffic in malls down drastically, if not shut off completely, due to government restrictions.
HBC, which also owns Saks Fifth Avenue and Saks Off 5th, has been asking landlords to absorb a portion of the rent to account for the declines in traffic and evolving regional lockdown orders, Putnam said.
“The vast majority of our landlords agree with this,” he said. “When we can’t come to a fair arrangement, we’ll let the courts decide what is fair and equitable.”
One luxury shopping mall — Bal Harbour Shops outside Miami, where HBC’S Saks Fifth Avenue is a tenant — described the situation differently.
Matthew Whitman Lazenby, chief executive of Whitman Family development LLC, which owns Bal Harbour, told Women’s Wear daily that he believed HBC was being an opportunist.
“Through this, three distinct groups of tenants have emerged: those that honour their obligations to the best of their ability and then ask for help after doing so, those that engage in productive discussions and then faithfully honour their revised obligations, and those that make a choice — often driven not by necessity but by a carefully calculated strategy — to intentionally default on their lease commitments and to seek to use the pandemic as a convenient excuse to evade their financial obligations,” Lazenby said. “regrettably, Saks Fifth Avenue seems to be such a tenant.”
HBC fired back, with executive chairman richard Baker telling Women’s Wear daily that Bal Harbour was using the media and the courts to “bully tenants.”
HBC also filed a defamation suit against Bal Harbour and Lazenby, accusing them of a “malicious public smear campaign designed for no purpose other than to exact revenge on a tenant who justifiably stood up to the unjustified demands of an unreasonable landlord.”
All told, it’s been a tough year since a group of majority shareholders led by Baker completed a rocky, monthslong process to take HBC private, a transaction that was completed mere days before COVID-19 took hold in earnest in North America.
during that process, HBC board members conceded that earnings were in steep decline, the department store landscape was deteriorating and turning the company around would take the sort of time-intensive changes that public markets don’t typically have the stomach for.
The retail landscape only got worse as 2020 progressed. By december, HBC was taking the Ontario government to court in an unsuccessful attempt to loosen the province’s lockdown rules that non-essential businesses could only stay open for curbside pickup. The rules were “crippling sales” during the pivotal holiday shopping season, HBC said in a filing to the Ontario Superior Court.
In that same filing, HBC revealed that sales at its stores in the Toronto area had fallen by up to 90 per cent between March and May 2020 compared to 2019. Sales improved through the summer, when restrictions eased, but were still “substantially lower on a yearover-year basis.”
despite the sales declines, Putman said HBC is still in a relatively good position.
“We have a tremendous real estate portfolio, which is under-leveraged, to start. And we have strong operating businesses,” he said. “There is no issue of our ability to continue to carry on business, no issue at all.”
HBC isn’t dealing with the same leverage profile as some of the other retailers that have sought creditor protection, he said.
The company has an asset-based loan to finance working capital, “which every retailer in North America has,” Putnam said, and while the company has some real estate debt, it is separate and apart from the operating company.