[Editor's Note: This article is a continuation of our story last week about the RioCan-HBC joint venture.]
When joint ventures between large companies turn sour, it's very often over money and one party not carrying its weight. It appears that the partnership between RioCan REIT (TSX: REI.UN) and the Hudson's Bay Company (HBC) has reached that point, with one of Canada's largest real estate investment trusts filing a motion in court over unpaid rent by Canada's oldest retailer.
As outlined by STOREYS last week, RioCan and the Hudson's Bay Company formed a complex joint venture in February 2015 and now jointly own 12 properties across the country, either through a freehold interest (inclusive of the land) or leasehold interest (not-inclusive of the land). As of this month, HBC holds a 78.0136% stake in the JV and RioCan holds the remaining 21.9864%.
Those 12 stores and the joint venture's ownership interest in the property are as follows:
- Square One - Mississauga, Ontario (Leasehold)
- Scarborough Town Centre - Scarborough, Ontario (Leasehold)
- Yorkdale - North York, Ontario (Leasehold)
- Carrefour Laval - Laval, Quebec (Leasehold)
- Les Promenades - St. Bruno, Quebec (Leasehold)
- Downtown Vancouver - Vancouver, British Columbia (Freehold)
- Downtown Calgary - Calgary, Alberta (Freehold)
- Downtown Montreal - Montreal, Quebec (Freehold)
- Downtown Ottawa - Ottawa, Ontario (Freehold)
- Devonshire Mall - Windsor, Ontario (Freehold)
- Georgian Mall - Barrie, Ontario (Freehold, 50%)
- Oakville Place - Oakville, Ontario (Freehold, 50%)
Upon its creation, the joint venture entity — RioCan-HBC Limited Partnership — became the holder of those ownership interests and then leased the spaces to Hudson's Bay to operate it stores. Under the various agreements, Hudson's Bay would pay the JV entity both basic rent (for space) and additional rent (for utilities and other costs), as is common with commercial leases.
According to RioCan, approximately 70% of the rent HBC pays to the JV is "used by the JV to fund costs and expenses, including, among other things, property operating costs, ground lease payments to landlords under head leases, general administrative expenses and debt service accounts in respect of the JV's property specific mortgages and other financing obligations."
RioCan's Motion
The motion filed by RioCan on Friday, ahead of today's hearing, is pertaining to the March 7 court order granting HBC creditor protection under the Companies' Creditors Arrangement Act (CCAA). Among other things, the court order allowed HBC to stop paying rent to the JV while HBC is under creditor protection, except to the third-party landlords of the five leasehold properties. Although the court order was for an initial creditor protection period of 10 days, there is no doubt HBC will be receiving an extension today — it has proposed an extension to May 15 — and the fight is now over whether the rent suspension will continue.
In their filing, RioCan called this rent suspension "unprecendented" and challenged the validity of this aspect of the order.
"It is a fundamental principle of Canadian insolvency law that CCAA debtors are to pay for goods and services and the use of leased property during the CCAA filing period," said RioCan. "This principle is codified in s.11.01 of the CCAA which provides, among other things, that, even where a Court exercises discretion under s.11 of the CCAA to make any order that it considers appropriate in the circumstances, no such order shall have the effect of prohibiting a party from requiring immediate payment for goods, services or use of leased property provided after the order is made."
They added that this has been standard practice in CCAA proceedings involving retailers and also pointed out that the remaining 84 of HBC's 96 stores across Canada were not treated this way and those landlords will continue to receive rent payments. Furthermore, RioCan said that the suspended rent payments are needed for the JV to service the debt it is carrying, including some mortgages that are set to mature in the near-term.
In an affidavit submitted along with the motion, RioCan's Chief Financial Officer Dennis Blasutti said that Hudson's Bay's monthly rent obligations total to approximately $10 million per month.
"However, RioCan believes that HBC is only currently prepared to honour approximately 15% of such monthly contractual rent obligation," Blasutti added. "The proposed treatment of the JV Entities by HBC will have a material impact on the JV and RioCan's interest in the JV. HBC should be required to honour its full contractual obligation to the JV Entities while it has occupation and use of the 12 properties it leases or subleases from the JV Entities."
Moreover, HBC received approval for debtor-in-possession (DIP) financing to fund its restructuring, but the term sheet approved by the court restricts HBC from making rent payments to the JV entity.
Fissures Forming
While that gripe is more so with the court, RioCan's motion also revealed some fissures between RioCan and Hudson's Bay.
According to RioCan, under the joint venture's original shareholder agreement, the Board of Directors of the limited partnership's general partner is comprised of four directors consisting of two nominees from RioCan and two from HBC. Under the agreement, major decisions require unanimous approval of all four directors.
However, RioCan's CFO says that HBC sought and obtained the rent suspension "without notice to, or consultation with, RioCan." Attached to Blasutti's affidavit is a March 11 email from RioCan's legal counsel (Goodmans LLP) to HBC's counsel (Strikeman Elliot LLP) stating that "RioCan was not served in advance with materials in connection with the application for the Initial Order."
After asking HBC to address RioCan's aforementioned concerns, counsel for RioCan stated that, "Failure to deliver any of the foregoing immediately to RioCan will result in RioCan taking any and all steps to protect its interests in connection with these matters, including, without limitation, filing materials in opposition to the HBC Applicants."
In its motion seeking to extend the creditor protection period that was also filed on Friday, HBC addressed the concerns, but not in the way that RioCan wanted, as HBC asked for the rent suspension to continue, calling it "the only reasonable outcome."
HBC argued that it is "appropriate" to think of HBC and the RioCan-HBC joint venture "as one enterprise." (The judge presiding over the case has described it was "fully intertwined.") HBC also stated that it does not have to ability to pay the full amount of rent owed to the JV, which HBC said was $8.5 million, despite RioCan stating $10 million. It said that it was able to secure $23 million in DIP financing, which is — accounting for the other restructuring activities that need to be funded — not enough to cover even two months of rent obligations.
"The prejudice to RioCan-Hudson’s Bay JV is relatively insignificant in comparison to the prejudice that would be suffered by the Applicants if payment of the JV Rent was not stayed," said HBC. "RioCan-Hudson's Bay JV is not receiving the JV Rent (other than the Head Lease Rent) and therefore cannot service its debt. However, this prejudice is temporary and RioCan-Hudson's Bay JV and the other Non-Applicant Stay Parties have the benefit of a stay. If payment of the JV Rent is not stayed, the orderly liquidation of the Applicants would collapse, the Applicants would lose the benefit of their DIP financing, and any chance of restructuring would be lost. This would be value destructive to the Applicants' stakeholders generally."
In other words, there is not much that RioCan and Hudson's Bay can agree on at the moment, and the disagreement playing out in public seems to point to the deterioration of their relationship.
