COURT OF APPEAL FOR ONTARIO
CITATION: Hudson's Bay Company v. OMERS Realty Corporation, 2016 ONCA 113
DATE: 20160210
DOCKET: C60988
Gillese, MacFarland and van Rensburg JJ.A.
BETWEEN
Hudson’s Bay Company and HBC CAN Real Property LP
Applicants (Respondents)
and
OMERS Realty Corporation, Yorkdale Shopping Centre Holdings Inc., OMERS Realty Holdings (Yorkdale) Inc., ARI YKD GP Inc., ARI YKD Investments LP, Square One Property Corporation, OMERS Realty Management Corporation, 156 Square One Limited, Scarborough Town Centre Holdings Inc., OMERS Realty Holdings (STC One) Inc., ARI STC GP Inc. and ARI STC Investments LP
Respondents (Appellants)
Sheila Block and Molly Reynolds, for the appellants
Jonathan Lisus and James Renihan, for the respondents
Heard: January 21, 2016
On appeal from the judgment of Justice Barbara A. Conway of the Superior Court of Justice, dated August 4, 2015, with reasons reported at 2015 ONSC 4671.
By the Court:
BACKGROUND IN BRIEF
[1] HBC CAN Real Property LP (“HBC CAN LP”) is a limited partnership whose sole limited partner is Hudson’s Bay Company (“HBC”) and whose sole general partner is HBC CAN Real Property Inc. (“HBC CAN Inc.”). HBC CAN Inc. is wholly owned by HBC.
[2] HBC and HBC CAN Inc. are anchor tenants in three shopping malls: Yorkdale, Square One, and Scarborough Town Centre. They operate Hudson’s Bay stores at each of these three leased locations.
[3] The malls are owned and operated by the appellant landlords (the “Landlords”), represented in this matter by Oxford Properties Group (“Oxford”). HBC is the tenant under the Yorkdale lease. HBC CAN Inc., as general partner of HBC CAN LP, is the tenant under the Square One and Scarborough Town Centre leases. HBC and HBC CAN LP are the respondents (“Respondents”) in this appeal.
[4] HBC and RioCan Real Estate Investment Trust (“RioCan”) are entering into a real estate joint venture. HBC is to transfer ten real estate properties – five owned and five leased – to the joint venture. The five leases include its leases at Yorkdale, Square One, and Scarborough Town Centre (the “Leases”). RioCan is to contribute a 50% co-ownership interest in Georgian Mall and Oakville Place, as well as cash. Originally, the plan was that all of the real estate assets of the joint venture would be transferred to a limited partnership, the general partner of which would be a corporation jointly controlled by HBC and RioCan.
[5] HBC sought Oxford’s consent to assign and sublease the Leases for the purposes of the joint venture (while not conceding that consent was required). Oxford expressed concern about the degree of control that RioCan – one of its main competitors – would have over the Leases.
[6] After various meetings between the parties, a revised joint venture was proposed. According to the Respondents, the changes were made to address Oxford’s concerns. The revised joint venture structure would consist of two limited partnerships, with the second being formed specifically to hold the Leases. The structure would be as follows:
• Limited Partnership #1: RioCan-HBC LP
o There would be two limited partners: HBC and RioCan. HBC would initially hold approximately 90% of the partnership units and RioCan would hold the remaining approximately 10%;
o The sole general partner would be 2455034 Ontario Inc. (“245”), a company jointly controlled by HBC and RioCan;
o All of the assets to be contributed to the joint venture, other than the Leases, would be transferred to 245 (as the general partner) and, thus, be jointly controlled by HBC and RioCan.
• Limited Partnership #2: HBC YSS LP
o There would be a sole limited partner, RioCan-HBC LP, which would hold approximately 99.9999% of the partnership units;[^1]
o The sole general partner would be HBC;
o The Respondents would assign the Leases to HBC in its capacity as the general partner of HBC YSS LP. The leased premises would then be sublet to HBC on a full “pass through” basis for the entire remaining terms of each lease, including renewals.[^2]
[7] The Respondents hoped that the revised structure would address Oxford’s concerns because the Leases would be assigned to HBC, in its capacity as general partner of HBC YSS LP, rather than to 245, a company jointly controlled by HBC and RioCan.
[8] When Oxford refused to consent, the Respondents brought an application under s. 23(2) of the Commercial Tenancies Act, R.S.O. 1990, c. L.7, for a declaration that the Landlords’ consents were not required for assignment and sublease of the Leases or, alternatively, that the Landlords were unreasonably withholding their consent to such assignments and subleases.
[9] The application judge found in favour of the Respondents. She noted that the Leases contain provisions that restrict their transfer or assignment. However, each of the Leases also contains an exception for an assignment to an affiliate of the existing tenant (the “affiliate exception”). She concluded that because the Leases will be assigned to HBC, as general partner of HBC YSS LP, the assignments fall within the affiliate exception. She also concluded that because the subsequent subleases will be to HBC, which is the same entity as the general partner (HBC), the subleases are permitted under the affiliate exception. Therefore, the application judge found, no consent to the assignments and subleases is necessary.
[10] The application judge then considered whether, if consent to the assignments were required, the Landlords had unreasonably withheld their consent. She found that the Landlords were entitled to withhold their consent under the Square One lease, which provides that consent to an assignment may be arbitrarily withheld. With respect to the Yorkdale and Scarborough Town Centre leases, however, the application judge found that HBC had met its burden of proving that the Landlords were acting unreasonably in withholding their consent. She explained that because HBC would continue to be the operator of the stores and liable under the Leases, there was no reason to believe HBC’s interests would diverge from those of Oxford, going forward.
[11] Oxford appeals.
THE ISSUES
[12] Oxford submits that the application judge erred by:
holding that the assignment “to a limited partnership through its general partner” is an assignment to an affiliated company or corporation and therefore exempt from the consent requirement;
finding, in the alternative, that the Yorkdale and Scarborough Town Centre leases require the Landlords to exercise their consent rights reasonably; and
ignoring uncontested evidence and applying the wrong legal test to the evidence regarding the Landlords’ reasons for withholding consent.
ANALYSIS
ISSUE #1: Assignment to an Affiliate
[13] Oxford’s major complaint in this appeal is that the application judge failed to appreciate that the assignments of the Leases would result in the limited partnership (HBC YSS LP) having beneficial and effective ownership of the Leases. As the sole limited partner is RioCan-HBC LP, and referring to the joint venture agreement, Oxford says that the assignments will result in RioCan (its competitor), having decision-making power over certain significant actions that might be taken in connection with the Leases.
[14] We do not accept Oxford’s characterization of the effect of the assignments. This is not a case, as Oxford suggested, of HBC holding bare title or being a mere nominee for the true beneficial owner. Furthermore, contrary to Oxford’s formulation of the first issue, the application judge did not hold that “an assignment to a limited partnership through its general partner was an assignment to an affiliate”. Rather, she concluded that the proposed assignments of the Leases would be to the general partner and not to the limited partnership. As such, what Oxford characterizes as the “beneficial” or “effective” ownership of the Leases cannot direct the analysis.
[15] In our view, the application judge correctly concluded that, based on the unique legal nature of the limited partnership structure and the role played by the general partner, the Leases will be assigned to HBC, as general partner.
[16] The application judge’s reasoning, which we adopt, can be summarized as follows.
[17] A limited partnership is not a legal entity. It is required by law to have a general partner through which it normally acts: Kucor Construction & Developments & Associates v. Canada Life Assurance Co. (1998), 41 O.R. (3d) 577, 1998 CanLII 4236 (C.A.). A limited partnership cannot hold title to real property. It can hold title to real property only through its general partner.
[18] Based on the description of limited partnerships given in Lehndorff General Partner Ltd., Re (1993), 17 C.B.R. (3d) 24 (Ont. Gen. Div.), at paras. 17 and 20, which this court quoted with approval in Kucor, the application judge drew three conclusions.
[19] First, any property in which a limited partnership has an interest can be held only by the general partner. In the case of a lease, there can be no assignment of the lease to the limited partnership – it must be assigned to the general partner.
[20] Second, it is not simply a matter of the general partner acquiring legal title to the property. The general partner has control over the property and is solely responsible for the operations of the limited partnership. The limited partner, as a passive investor, is restricted from taking part in the control or management of the business. To do otherwise would jeopardise its limited partner status.
[21] Third, from the perspective of the other contracting party, the general partner is solely liable for all payments under the contract and performance of all obligations thereunder. The limited partners have no such liability. In this case, once the Leases are assigned, the legal relationship will continue to be between the Landlords and HBC. There will be no relationship between the Landlords and the limited partner. HBC alone will be liable for rents and all amounts owing under the Leases. HBC alone will be responsible for compliance with all obligations and covenants under the Leases. Thus, there will be no change in the legal relationship between HBC and the Landlords following the assignments.
[22] For these reasons, the application judge stated, in determining who will be the assignee of the Leases, there is no reason to look beyond the fact that the Leases are being assigned to the general partner. HBC as the general partner is the assignee, the affiliate exception applies and consent is not required. Because the subsequent subleases are to HBC, which is the same entity as the general partner, the subleases are also permitted under the affiliate exception.
[23] We see no basis for interfering with the application judge’s determination that, in light of the affiliate exception, the Respondents did not need consent to assign the Leases to HBC as general partner of the limited partnership. HBC is assigning the Leases to itself in its capacity as general partner of HBC YSS LP.
[24] Accordingly, this ground of appeal is dismissed.
ISSUES #2 and #3: Withholding Consent and Reasons Therefore
[25] In light of our conclusion on the first issue, it is unnecessary to address these grounds of appeal.
DISPOSITION
[26] For these reasons, the appeal is dismissed. No order is made as to costs as the parties have resolved that matter between themselves.
Released: February 10, 2016 (“E.E.G.”)
“E.E. Gillese J.A.”
“J. MacFarland J.A.”
“K. van Rensburg J.A.”
[^1]: This permits the economic benefits of the Leases to flow up to HBC and RioCan.
[^2]: The sublease rents will be higher than the rents under the Leases, which generates the economic benefits to flow to RioCan-HBC LP as limited partner of HBC YSS LP.