Court File and Parties

COURT FILE NO.: CV-21-00654610-0000 DATE: 20210216 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

713949 ONTARIO LIMITED Applicant – and – HUDSON’S BAY COMPANY ULC Respondent

Counsel: Gasper Galati and Dina Peat, for the Applicant Jonathan Lisus, James Renihan and Carter Liebzeit, for the Respondent

HEARD at Toronto: February 4, 2021

Reasons for judgment S.F. Dunphy J.

Reasons for Judgment

[1] The landlord applicant seeks declaratory relief concerning its ability to lease space in an Ottawa shopping mall formerly occupied by Sears Canada to a bank for the purposes of a call centre. The respondent Hudson’s Bay Company ULC claims that its consent to what it characterizes as a material change to the merchandising plan for the mall is required by the terms of its lease.

[2] For the reasons that follow, I agree with the respondent and am dismissing this application with costs.

[3] The proposed new lease would result in a dramatic decrease in space devoted to retail use in the shopping mall and corresponding increase in space devoted to office use. This clearly represents a “major change to the merchandising balance of the mall” that triggers a requirement for the tenant HBC’s consent. The tenant has not waived its rights under the lease in fact and, at all events, by the terms of the subject lease its rights are not subject to waiver by conduct. The decision of the tenant to withhold its consent to the proposed change was objectively reasonable in all of the circumstances having regard to the reasonable prospect of an adverse effect upon the quality and nature of the pedestrian flow in the mall generally and affecting HBC’s store in particular. The mere fact that efforts to locate one or more suitable retail tenants have been put on hold by the pandemic is far from establishing that there remains no reasonable prospect of a successful retail leasing effort even if the proposed tenant may be offering advantageous economic terms from the landlord’s point of view. I find no evidence that the tenant has asserted its rights in bad faith or for a collateral purpose. The tenant’s willingness to negotiate the terms of a consent do not amount to bad faith and the landlord’s and tenant’s rights and remedies in respect of any pending pandemic-related disputes have nothing whatever to do with this issue and are quite unaffected by my decision herein.

Background facts

[4] The retail environment in Canada has been undergoing very significant changes in recent years. One such change was the insolvency of Sears Canada which filed for protection under the Companies’ Creditors Arrangement Act, R.S.C. 1990, c. C-36 in 2017 and, in the course of that proceeding, abandoned its former lease in an Ottawa shopping mall known as the St. Laurent Mall. The applicant landlord repossessed the former Sears premises in January 2018.

[5] Prior to January 2018, Sears had been one of two major department stores in the mall, the other being the respondent HBC which operates “The Bay” department stores. Since that time, the landlord applicant has been seeking to re-lease the space without success until the present.

[6] The former Sears space and The Bay occupy two corners of what is essentially a triangular-shaped [1] retail mall space. Excluding the basement space formerly occupied by Sears, the Sears space accounts for approximately 133,518 square feet of the ground floor and second floor of the mall compared to approximately 145,074 square feet occupied by The Bay. The Sears space overall accounts for approximately 20% of the leasable space in the mall surpassed in size only by the space occupied by the respondent HBC.

[7] The foregoing overview helps paint a picture of the commercial context in which the subject-lease is to be placed. When the HBC lease was entered into, two major department stores were intended to be anchoring two of the three corners of the retail area of the mall as it was laid out. One of those anchors – Sears – has gone out of business. This dispute concerns the relative rights of the landlord and HBC as the remaining department store tenant as to how that now-vacant space is to be used.

(a) The HBC lease

[8] HBC’s lease of its premises in the St. Laurent Mall is dated – in its current form - March 25, 1997. The initial lease term was for 20 years commencing March 13, 1991 and ending March 12, 2011. There was obviously a predecessor lease but its terms are not material to this dispute. The lease originally provided for eight consecutive ten-year renewal options, the first such option having been exercised with the term being thereby extended to March 12, 2021 subject to further extensions as provided.

[9] Prior to the end of the first extended term, the parties entered into a Lease Amending Agreement dated September 24, 2020. Pursuant to this amending agreement, the remaining seven ten-year renewal options were converted into fourteen five-year renewal options, the first being deemed to be exercised such that the current expiry of the lease is now extended until at least March 12, 2026. At that time, the tenant will have the right to exercise further extension options for up to 65 more years in total. It is a long-term lease by any definition of that term. The amendment also authorized the tenant to alter its required use of the premises from exclusively that of a Major Department Store to include operating a large format retail store notwithstanding the terms of the lease. It is this lease, as so amended, that is the object of this application.

[10] Article 14 of the Lease is entitled “Leases to Other Tenants”. Clause 14.00(1) thereof references the “Merchandising Plan” and contains a representation by the landlord that “[in] making or permitting to be made any lease … of any rentable space in the Shopping Centre … the Landlord agrees that except as set out herein, without the written consent of the Tenant (such consent not to be unreasonably withheld except as otherwise provided herein), no lease of any space or location in the Shopping Centre shown on the Merchandising Plan shall be made” other than for a type and class of use designated for such space or location on the Merchandising Plan.

[11] There is thus a general requirement for tenant consent to leases that depart from the Merchandising Plan but this is subject to exceptions. Clause 14.00(3) of the Lease creates such an exception as follows:

Notwithstanding anything to the contrary contained in this Article 14, the Landlord may make occasional changes to the Merchandising Plan without the Tenant's approval provided such changes … do not represent a major change in the merchandising balance of the Shopping Centre, will not materially change pedestrian flow and will not detrimentally affect the Tenant's merchandising environment.

[12] Where the tenant’s consent is required by clause 14.00(3) to a proposed lease because of the change that would result to the Merchandising Plan, a procedure for securing the tenant’s consent is provided for in clause 14.00(5). This procedure requires the landlord to provide the tenant with “all information necessary to enable the application to be fairly considered … and shall state the Landlord’s reason for requesting the change” while the tenant in turn is required to grant or decline its consent with reasons in writing within fifteen days.

(b) Events leading up to the Application

[13] The applicant has supplied a high-level summary of its efforts to re-lease the Sears space since the departure of that major tenant in January 2018:

a. The applicant sought but failed to secure interest from a major department store – a task that was undoubtedly more difficult in the 2018 environment than it may have been in previous years due to the on-going changes in the North American retail environment particular in the department store category;

b. The applicant then began looking at options to redevelop the space to permit leasing to several smaller retail tenants on the ground level and potentially office-use tenants on the upper level. Those efforts generated some interest from prospective tenants but were adversely impacted by the pandemic in early 2020.

[14] In the summer of 2020, the applicant received expressions of interest from a Canadian bank – TD Bank – who was interested in pursuing a possible lease of the Sears premises. Those discussions became more active in October leading to the execution of a conditional lease between the applicant and TD on January 11, 2021 immediately before this application was filed the next day.

[15] In the same time frame and continuing through to mid-December 2020, there were other negotiations on-going between the landlord and HBC both regarding the St. Laurent Shopping Centre and other properties leased by HBC with an affiliated company of the applicant. Among other things, there was a dispute between the parties regarding the rent obligations of HBC at a number of locations during the pandemic which erupted into a law suit. In the course of these discussions, there were also some discussions between them regarding the possible TD Bank lease at the St. Laurent mall. The applicant’s position in those discussions was that HBC had no consent rights in relation to the proposed TD lease.

[16] It is not clear how much information regarding the proposed TD lease was exchanged during the course of these negotiations. Given the fact that HBC and the landlord (and various of its affiliates) were in a dispute involving multiple properties that had resulted in a suit that was before the courts and that the landlord expressed the view that HBC had no consent rights at all in relation to the proposed TD lease, I am not prepared to infer that these discussions were particularly granular or productive.

[17] On December 17, 2020, the landlord through its counsel sent a letter to HBC. The terse, two-page letter referenced the on-going rent dispute between the parties, metioned that it was advising the tenant of developments despite the legal dispute between them and then provided the following information regarding the developing TD Bank initiative:

As you have been apprised, the Landlord intends to imminently enter into an agreement to lease with The Toronto Dominion Bank ("TD"), for purposes of redeveloping the former Sears Department Store at the Shopping Centre. The former Sears Department Store will be converted to a TD Bank service office/call centre. TD will invest significantly in the site. TD's anticipated complement of staff employed at the site is estimated to be 1,200-1,500. The Landlord has confirmed that the existing, ample parking facilities at the Shopping Centre are more than adequate to satisfy municipal requirements and the terms of the Lease. The prospect of securing this significant replacement tenancy, for space that has sat vacant for over 3 years, represents a tremendous opportunity to enhance the long term success of the Shopping Centre, for the benefit of both parties, all tenants and all other stakeholders.

[18] No further information regarding this potential lease was provided. The next paragraph of the letter denied that HBC had any right to object to the proposed lease for reasons previously discussed. The last paragraph nevertheless concluded by requesting that the tenant sign the letter back within four days signifying its lack of objection. The letter contained a place for HBC to sign the letter back underneath the phrase: “The Tenant does not object to the replacement of the former Sears Department Store with a TD Bank service office/call centre as set out above.”

[19] The leasing proposal to which HBC was thus requested to signify its non-objection contained no mention of a proposal for TD to include a retail aspect to its proposed operation although this prospect has apparently emerged or been disclosed after this Application was filed. The respondent had no information about this potential retail component to the proposed lease when it was asked for and declined to grant its consent. In my view, no material weight can be given to this aspect of the proposed lease both by reason of the lack of any detail concerning it and the timing of its revelation relative to the decision taken by the respondent.

[20] HBC responded to this overture with a letter from its own litigation counsel dated December 21, 2020. The letter noted that the Sears space is designated as a department store in the Merchandising Plan referenced in Article 14.00 of the Lease and indicated that “[a]s the proposed lease is inconsistent with the Merchandising Plan and would detrimentally impact HBC's store, HBC declines to provide the requested consent.” With that short sentence, the respondent communicated both its decision to withhold its consent and the reason for that decision.

[21] The next written communication between the parties was the service of the Notice of Application herein dated January 12, 2021 along with an expert report of Mr. Archer dated January 11, 2021 to which some reference shall be made below.

[22] The Application as filed refers to the January 11, 2021 Agreement to Lease between the applicant and TD. The TD agreement is subject to a condition by which TD must be satisfied that HBC has no right to block the proposed lease which condition must be satisfied either by (i) a settlement agreement or (ii) a court order. The deadline for satisfaction of this condition was originally February 1, 2021 but was moved to February 28, 2021 to permit time for this Application to be heard and decided.

Issues to be decided

[23] The following are the four principal four issues raised by the Applicant:

(a) Does the proposed TD lease constitute a change to the Merchandising Plan authorized to be undertaken by clause 14.00(3) of the HBC lease without the consent of HBC?

(b) If not, has HBC waived its right to object to the proposed TD lease?

(c) If not, has HBC unreasonably withheld its consent to the proposed TD lease?

(d) If not, has HBC acted in bad faith in such a manner to deprive it of its right to object to the proposed TD lease?

Analysis and discussion

(a) Does the proposed TD lease constitute a change to the Merchandising Plan authorized to be undertaken by clause 14.00(3) of the HBC lease without the consent of HBC?

[24] Clause 14.00(1) of the HBC lease contains a general covenant of the landlord not to lease space in the shopping centre other than for a “type and class of use which is the same as or in substantial conformity with the type and class of use” designated for the space in the Merchandising Plan.

[25] The “Merchandising Plan” in the HBC lease is defined as Schedule C thereto “as from time to time amended”. Schedule C is an floor plan of the shopping mall showing all of the tenants at the time. The space formerly occupied by Sears is clearly identified as “Sears” thereon.

[26] However, one may wish to characterize the use of the premises proposed by TD, there is no way to equate the proposed new use of the space by TD with the retail use of it made by Sears. The difference between them is not merely apples to oranges, it is apples to turnips. The Merchandising Plan in respect of the Sears space has not been materially amended since the HBC lease was entered into.

[27] The proposed TD lease would clearly represent a change to the Merchandising Plan as it stands today – the question is whether the change is an authorized one or not.

[28] In agreeing to enter a long-term relationship with each other, both landlord and tenant closely negotiated the metes and bounds of the freedom of commercial action of the other so as to defend their respective commercial interests. The meaning of the words selected by the parties to reflect their agreement must be considered in the context of the objects of the agreement itself where the plain meaning of the words is itself an insufficient guide.

[29] The Merchandising Plan was clearly an element of that initial bargain. It evolves as tenants come and go, but the boundaries of the landlord’s right to steer its evolution through the leasing process remains subject to the limits prescribed by the HBC lease. Changes to the tenant mix outside of the limits described in clause 14.00(3) require the consent of HBC, changes within may occur at the landlord’s discretion (subject, of course, to other applicable provisions of the lease – I address here only the subject of the Merchandising Plan).

[30] Clause 14.00(3) imposed a very tight level of restrictions upon the landlord’s freedom to vary the Merchandising Plan within an area identified as the “Control Area” in the immediate vicinity of The Bay. The Sears space is outside of that Control Area.

[31] Outside of the Control Area, the landlord’s freedom to alter the Merchandising Plan without the tenant’s approval must satisfy three conditions: (i) it must not “represent a major change in the merchandising balance of the Shopping Centre; (ii) it must not “materially change pedestrian flow” and (iii) it must not “detrimentally affect the Tenant’s merchandising environment”.

[32] Since the proposed TD lease has been found by me to create a change to the Merchandising Plan, if that proposed lease violates even one of the three stipulated conditions, HBC’s approval to such change is required by clause 14.00(3) of the HBC lease.

[33] It is HBC’s contention that the proposed TD lease runs afoul of each such condition and that its approval is therefore required by clause 14.00(3) of the HBC lease. Relying in significant measure upon the expert opinion of Mr. Archer, the applicant submits that the proposed lease violates none of them and that its December 17, 2020 request for HBC’s consent to the change should be viewed as a without prejudice courtesy request only.

[34] I shall dispense with reviewing the eminent qualifications of the experts whose opinions the parties tendered to me in aid of their respective arguments. The expertise of each was admitted.

[35] Would the proposed TD lease represent a “major change in the merchandising balance of the Shopping Centre”?

[36] Mr. Archer’s opinion addressed the question of office use generally and its desirability within a shopping centre environment primarily from a qualitative point of view rather from the perspective of the materiality of the change that would be brought to the merchandising balance reflected in the existing Merchandising Plan. As such, I found it to be of limited assistance.

[37] The Merchandising Plan currently designates the subject space as “Sears” and Sears is designated as one of two major department stores in the shopping centre. Department stores are described as a category of “Retail Premises” in the lease’s definition of that latter term.

[38] Examined objectively, there can be no question but that the proposed TD lease would operate a major change to the merchandising balance of the shopping centre. Given the size of the Sears space within the project, it is hard to imagine how any change in use of such a large space could fail to be characterized as “major”. An examination of the “before” and “after” picture of the shopping centre makes this conclusion virtually inarguable.

[39] Before, the Sears space consisted of three levels. The lower level was devoted largely to office-related activities. The ground floor level was at the same level as the bulk of the other retail operations in the mall and opened directly on to one of the main pedestrian retail corridors. When operating, Sears was the second largest retail space in the shopping centre.

[40] The “after” portrait could not be more different. The proposed TD operation will have little to nothing in common with the former Sears operation. Mr. MacDonald on behalf of the Applicant conceded as much, admitting that they are “two different uses”. Mr. Archer also conceded that it is a “major change” when cross-examined. The proposed TD lease would effect a permanent change of the second largest leased unit in the shopping area of the mall. A space currently designated for use as a department store, itself a sub-category of “Retail Premises”, would be permanently converted into office space. That such a change should be viewed as a major change to the merchandising balance is self-evident.

[41] The desirability or quality of the change is an entirely different question that shall be addressed in considering the reasonableness of HBC’s failure to consent to it. There can be no question that the proposed TD lease would effect a “major change in the merchandising balance of the Shopping Centre”.

[42] The parties hotly disputed the correct method of measuring the “office” component of the existing merchandising mix. I see no need to dive so deeply into the fine detail. However measured, the office use component in the shopping centre would grow dramatically if measured “before” and “after” and will be migrating to a much more prominent location in a formerly prime retail location within the main pedestrian shopping corridors.

[43] The applicant suggested that the change ought to be considered relative to the current use of the Sears space which is both vacant and unleased. There may well be a point where the landlord’s inaction in seeking to fill a vacant space might be characterized as a change to the Merchandising Plan – that is not a question before me today. The landlord has been actively seeking a new tenant for the subject space. Whatever barbs the respondent may be inclined to launch by reason of the level of effort and resources devoted to the task, there has been no decision taken to leave the space vacant for one day longer than it will take to find an appropriate tenant. From this I conclude that there has been no change to the Merchandising Plan in relation to the Sears space as the vacancy is still intended to be temporary.

[44] I find that the proposed TD lease would result in a major change to the merchandising balance of the shopping centre.

[45] Will the proposed TD lease “materially change pedestrian flow”?

[46] Mr. Archer noted that the proposed TD lease envisions the creation of a new pedestrian corridor connecting the north parking area to the mall containing new proposed retail areas that would “improve” pedestrian flow. A possible “improvement” to some aspects of pedestrian flow does not address the question of the materiality of the change to pedestrian flow.

[47] Mr. Archer’s evidence makes it quite clear that the proposed TD lease will materially change pedestrian flow. The new corridor will direct pedestrian flow relative to the parking area and the shopping areas in ways it is not currently directed. The addition of in excess of 1,000 primarily shift workers at a call centre to the former Sears space will alter pedestrian flow in a material way as well whether considered in relation to the current vacant space or in relation to the flow that existed when Sears was still operating as a retail space with pedestrian shoppers as opposed to workers coming to and fro.

[48] Whether it is reasonable for HBC to object to these material changes is a separate question. There can be no question that the proposed changes will produce a “material change to pedestrian flow” and I so find.

[49] Will the proposed TD lease “detrimentally affect the Tenant’s merchandising environment”?

[50] Unlike the first two, this last condition in clause 14.00(3) does require a qualitative assessment of the impact of the proposed change in use upon HBC as tenant.

[51] On cross-examination, Mr. MacDonald for the applicant admitted that on average more than 100,000 pedestrians per month formerly entered the shopping centre via the Sears store – data that was collected back to 2013-14 when pedestrian counters were in place and Sears was in operation. That pedestrian traffic entering via Sears in the past can safely be described as containing a large contingent of people whose primary purpose for being there was to shop. The proposed TD lease would see this traffic replaced in large measure with daily workers at a call centre whose primary reason for being there will be entirely different even if some of them will shop from time to time.

[52] Replacing the second largest retail operation in the mall with a call centre and office space will clearly change the merchandising environment for HBC. Those changes cannot be described as other than adverse when contrasted to the former retail operation conducted in the premises.

[53] This last condition in clause 14.00(3) can only be meaningfully examined relative to the merchandising environment contemplated by the Merchandising Plan that the condition is directed to rather than by comparison to the transitional and temporary merchandising environment created by a vacancy. A retail operation as is currently required for the Sears space in the Merchandising Plan offers more synergies to another retailer such as the Bay than does a call centre office operation. This self-evident proposition was also supported by the evidence of both experts as explored on cross-examination.

[54] I find that the proposed TD lease will detrimentally affect the Tenant’s merchandising environment relative to a retail use of the same premises. The transitory vacancy of that space does not alter this conclusion as such vacancy cannot be presumed to be a permanent and unchangeable fact.

[55] The applicant submits that Article 20 of the HBC lease create a separate avenue to alter the Merchandising Plan in respect of the Sears space without regard to clause 14.00(3) of the HBC Lease.

[56] What restrictive permission Article 20 grants in relation to certain described expansion, renovation or building developments on the site is subject to existing prohibitions in the HBC lease. There are prohibitions on altering the Merchandising Plan in Article 14 for which no exemption can be found in Article 20. The proposed lease to TD by its nature alters the Merchandising Plan even if it also provides for certain renovations and construction activities to outfit the space before they move in. Even if Article 20 were applicable to the proposed renovations required to outfit the space for TD – about which I express no opinion – the change to the Merchandising Plan resulting from the lease itself is subject to Article 14.

[57] The applicant submits that HBC has forfeited its rights top grant or withhold its consent under clause 14.00(3) by reason of the alleged fact that HBC ceases to operate a “Major Department Store”. Clause 14.05 provides that the landlord is not obliged to observe its covenants in clause 14.00 of the HBC Lease if the tenant “is in default of its covenant under subclause 6.00(1) hereof to continuously use and operate the Bay Department Store as a Major Department Store” [emphasis added].

[58] The Applicant has not established on the evidence that HBC has committed a default under clause 6.00(1) of the HBC lease. The subjective observations that the tenant’s premises are being “underutilized, with uneven merchandise” is a very, very long way from establishing the required continuing default under Art. 6.00. Further, the HBC lease was amended effective September 24, 2020 to remove the requirement that HBC must operate a “Major Department Store” at all. This objection is thus entirely without merit because there is no longer a possible default for failing to operate a Major Department Store.

[59] There is no default under art. 6.00 of the HBC lease as amended and clause 14.00(5) has no application to the present dispute.

[60] I therefore conclude that the proposed TD lease will create a change to the Merchandising Plan that cannot be effected without the consent of HBC pursuant to clause 14.00(3) of the HBC lease.

(b) If not, has HBC waived its right to object to the proposed TD lease?

[61] The applicant submitted that various changes made to the mall over the years have had the effect of altering the merchandising balance in the shopping mall by increasing the amount of office space in the mix all without objection by HBC. The applicant submits that HBC’s conduct over the years amounts to a waiver by HBC of the landlord’s requirement to comply with Article 14.00 in relation to changes to the Merchandising Plan.

[62] This objection is legally untenable by reason of the express language of clause 25.01 of the HBC lease but is factually unsupported as well.

[63] Waiver of an explicit contractual right – in this case, the right to consent to changes to the Merchandising Plan – requires (i) knowledge of the facts giving rise to the breach alleged to have been waived; and (ii) words or actions amounting to an unequivocal and conscious intent to relinquish the right in question: Bradfield v. Royal Sun Alliance Insurance, 2019 ONCA 800 at para. 30-33.

[64] The applicant pointed to a decision to lease certain premises to Intact Insurance for office use as evidence of waiver. The problem with this submission is that the premises occupied by Intact Insurance appear as office space in the original Merchandising Plan. There is simply no basis to suggest that entering into the Intact Insurance lease without objection by HBC can be pointed to as a waiver of anything. The applicant has similarly failed to establish that any of the other leasing decisions referenced – some of which pre-date the HBC lease and the applicant becoming successor landlord – amounted to unauthorized changes to the Merchandising Plan.

[65] The evidence presented does not rise near the strict standard required to establish a conscious waiver of contractual legal right.

[66] The debate is however an academic one given the explicit language of clause 25.01 of the HBC lease that provides:

Any condoning or overlooking by the Landlord or the Tenant of any default, breach or non-performance by the other at any time or times in respect of any obligation contained in this Bay Lease shall not operate as a waiver of such default, breach or non-performance and any waiver of a particular default, breach or non-performance shall not operate as a waiver of any subsequent or continuing default, breach or non-performance.

[67] There has been no waiver by HBC of its rights to consent to a change to the Merchandising Plan. HBC’s rights to consent to the proposed TD lease under clause 14.00(3) have not been waived.

(c) If not, has HBC unreasonably withheld its consent to the proposed TD lease?

[68] The applicant submits that if HBC has a right to consent to the proposed TD lease, then its consent is being unreasonably withheld contrary to Article 14 and it may therefore proceed notwithstanding. In particular, the applicant submits that the proposed TD lease is in the tenant’s best interest, that HBC was “hasty” in its refusal, that HBC’s reasons for refusing its consent are speculative and that the refusal of the tenant to consent is motivated by an improper attempt to secure a collateral benefit.

[69] Cullity J. provided a useful summary of the case law in this area in 1455202 Ontario Inc. v. Welbow Holdings Ltd. at para. 9, from which I extract the following applicable principles:

a. The burden is on the party alleging that the refusal to consent was unreasonable;

b. The question the court must answer is not whether a reasonable person might have given consent but whether a reasonable person could have withheld it;

c. In reviewing the matter of reasonableness, it is the information available to and the reasons given by the party when consent was refused that must be examined and not additional facts, circumstances or reasons provided subsequently to the court; and

d. The reasonableness of the refusal of consent must be considered in the particular circumstances and economic realities of each case.

[70] To the foregoing summary, I would add the observation of Ferguson J. in 2197088 Ontario Limited v. Cadogan Corporation, 2018 ONSC 3070 at para. 23 that it is only necessary to demonstrate that “a reasonable person might have reached the same conclusion under the same circumstances … The court is not entitled to substitute its own decision” for the decision under review.

[71] Clause 14.00(5) provides a specific procedure to be followed in seeking the consent of HBC to a proposed change to the Merchandising Plan. This requires the landlord to “apply in writing to the Tenant requesting the Tenant’s consent … accompanied by all information necessary to enable the application to be fairly considered ... and shall state the Landlord’s reason for requesting the change”. Upon receipt of such request, the Tenant is directed to consider the request promptly and respond within fifteen days, stating its reasons for declining if no consent is given. The applicant’s actions in this case paid but scant attention to the prudent procedure dictated by clause 14.00(5) of the HBC lease.

[72] The document presented to me as amounting to the landlord’s written application for consent was the demand letter sent on December 17, 2020. As far as “applications” for consent go, this letter was more in the way of an ultimatum then an application. It provided next to no information regarding the proposed lease or its potential impact on such matters as pedestrian flow, merchandising balance or the tenant’s merchandising environment. No copy of the proposed lease was provided. It demanded a response within only four days despite the looming Christmas holidays and was premised by a blanket denial of the need to obtain consent in the first place.

[73] In summarizing the request as I have done, I am not ignoring the evidence that there were several weeks of discussions that preceded this letter during which the parties discussed a number of outstanding issues between them, including the rent dispute litigation and the prospect of leasing the Sears space to TD. However, there is little in the record to indicate what concrete information relating to the request being made was transmitted during this time frame. In particular, there is little to suggest that any detailed information was forwarded that might have enabled the proposal to be assessed in terms of its impact on such matters as pedestrian flow in the shopping centre, merchandising balance of the shopping centre, the impact upon HBC’s merchandising environment in the shopping centre or specific details regarding the efforts of the applicant to attract retail tenants to the space or its plans to do so after the pandemic restrictions are eased.

[74] While the authorities direct me to restrict me review of reasonableness to the evidence of what information was conveyed by the party requesting consent and the reasons given for refusal, the record before me extends to the research conducted by both parties’ experts in preparation for this hearing and the opinions given my them in relation to it. Whether I consider the matter solely from the perspective of the information record as it stood in the December 17 – December 21, 2020 time frame (the date of the request for consent and the date of its refusal) or whether I consider the matter from the perspective of the totality of the record subsequently assembled by the parties, the result is the same. The decision to withhold consent was objectively reasonable from either perspective.

[75] The starting point must be the request as made by the landlord and the reasons for refusing that request given by the tenant. The landlord described the proposal as “a pressing initiative that is for the betterment of the Shopping Centre and therefore in the best interests of both parties”, providing the following additional details regarding the lease with TD that it proposed imminently to enter into:

TD will invest significantly in the site. TD's anticipated complement of staff employed at the site is estimated to be 1,200-1,500. The Landlord has confirmed that the existing, ample parking facilities at the Shopping Centre are more than adequate to satisfy municipal requirements and the terms of the Lease. The prospect of securing this significant replacement tenancy, for space that has sat vacant for over 3 years, represents a tremendous opportunity to enhance the long term success of the Shopping Centre, for the benefit of both parties, all tenants and all other stakeholders.

[76] The tenant’s response was not significantly more detailed but included the following:

While the Landlord has some ability to amend the Merchandising Plan, it cannot amend it to allow for a TD Bank service office/call centre. Pursuant to Article 14.00(3), the Merchandising Plan cannot be amended in any manner that would represent a major change in the merchandising balance of the shopping centre or would materially change pedestrian flow. Replacing a major department store with a TD Bank call centre would result in a significant change to the merchandising balance and pedestrian flow in the shopping centre.

As the proposed lease is inconsistent with the Merchandising Plan and would detrimentally impact HBC's store, HBC declines to provide the requested consent.

[77] The basis of the application for consent as presented by the landlord is the fact that the space had been vacant for three years and there is enough parking to accommodate the estimated 1,200 to 1,500 staff expected to be employed. The first reason given provides no reasonable ground to alter the bargained-for Merchandising Plan unless it is assumed that attempts to locate tenants that either fit within the existing Merchandising Plan or alter it to the least extent necessary. There is simply no satisfactory evidence to support that critical threshold assumption.

[78] The applicant has provided only high-level generalities regarding its re-leasing efforts since the departure of Sears in January 2018. The opinions expressed by the applicant’s expert Mr. Archer that these efforts have been adequate or even exemplary are based on his own undisclosed hearsay discussions with officers of the applicant and are of no evidentiary value whatsoever.

[79] There is evidence before me that other Canadian landlords affected by the closure of Sears locations – indeed a strong majority of them – have successfully re-leased premises vacated by Sears. Landlords looking to fill vacant space have a variety of tools at their disposition. These include providing inducements to entice prospective tenants to locate, re-locate or expand into the space, offering attractive lease rates or tenant improvement allowances, etc.

[80] The applicant’s own evidence is that having failed to generate interest for a single retail tenant to assume the Sears space, it was generating interest in its efforts to interest multiple retail tenants in a possible retail reconfiguration of the former Sears space. Those efforts were either delayed or halted when the pandemic struck.

[81] The pre-pandemic “Situation Analysis” prepared by the applicant prior to the TD lease opportunity becoming available noted the low regional unemployment and the healthy regional retail sales figures, recent employment and wage gains and the arrival of Light Rail Transit to the mall. It described the Sears closure as “an opportunity to reinvigorate the shopping centre with new retailers in that space”. It noted as a weakness the less affluent trade area and the advantages to the retailers in the mall of reinvigorating the retail mix. There is no basis to conclude that the opportunity being pursued by the landlord prior to the pandemic has been permanently and definitively foreclosed although the opportunity would be foreclosed were the TD lease to move forward.

[82] The commercial realities of the Canadian marketplace may well place the likelihood of a new department store deciding to locate in the Sears space as a very distant and indeed remote prospect. The interests of a tenant in HBC’s circumstances do not end there and the evidence is very, very far from satisfying me that the only long-term options for this space are to leave it vacant or convert it to office space. Even if retail leasing opportunities have been delayed or postponed by the pandemic, there was and is no basis to conclude that they have become permanently non-viable.

[83] The respondent’s lease may well have decades to run – a decision regarding a fundamental and permanent re-alignment of the merchandising mix of the mall is not to be assessed in the light of a short-term or transitory event, even one as profound and impactful as the pandemic has proved to be.

[84] Accordingly, I find that it was reasonable for HBC to assess the proposed TD lease in light of the prospects for the space to be leased in future for retail use and not merely to compare the proposal to a vacant space.

[85] I am satisfied on the evidence before me of the following:

a. Office space offers fewer synergies to a retail tenant in HBC’s situation than does retail space;

b. Call centre office space in particular offers few if any synergies to a shopping centre retail tenant. They do not deal with members of the public on site and their employees receive lower end of average wages;

c. The proposed TD lease would more than double the square footage in the mall occupied by office space while reducing the available leasable retail space – such a development is both material and adverse to a tenant in HBC’s situation; and

d. Whereas little of the existing office space in the mall occupies prime retail space in the retail areas of the mall along which pedestrian traffic is flowed, the proposed TD lease would remove on a permanent basis the second largest retail space in the mall.

[86] Indeed, the very fact that each side has produced learned experts whose opinions differ so dramatically regarding the prospects for the Sears site amply demonstrates that a reasonable person in the situation of the respondent could refuse to grant the requested consent.

[87] The applicant suggests that the rejection by HBC is motivated by an improper or collateral purpose. In support of this contention, the applicant points to evidence that HBC offered to negotiate the question of consent if the landlord had any proposals to make. There is nothing untoward in a commercial business indicating a willingness to negotiate a resolution to a dispute about a proposal that it views as economically damaging to its interests. Indeed, the proposed TD lease contemplates that the condition relative to tenant consent can be resolved by a court order or a settlement agreement. The mild overture in the direction of discussing a possible settlement responsibly made by HBC is a long way from establishing an improper collateral purpose underlying the December 21, 2020 refusal of consent.

[88] For the foregoing reasons it is simply not possible to conclude that HBC’s decision to withhold its consent to the proposed TD lease was unreasonable. To the contrary, the reasons for doing so appear objectively compelling in light of the information provided to the tenant and in the circumstances then existing. I conclude that a tenant in HBC’s position and armed with the information available to it might reasonably have withheld its consent to the proposed TD lease.

(d) If not, has HBC acted in bad faith in such a manner to deprive it of its right to object to the proposed TD lease?

[89] While the TD lease issue was gently percolating in the background, a simmering dispute between HBC and the applicant regarding rent accruing during the pandemic flared into open litigation last year.

[90] Whatever rights or remedies the landlord has arising from the alleged failure of HBC to pay some or all of the rent accruing due under the HBC lease or other leases with affiliates of the applicant, the applicant has its remedies. It has turned to the courts in other proceedings to vindicate those rights. I am not seized of that litigation and it is not before me for resolution.

[91] The simple fact of the matter is that the tenant’s rights under Article 14 are quite independent of the question of arrears of rent. There is no allegation before me that the lease has been terminated by either side. Pursuant to clause 14.05, the landlord is excused from performing its Art. 14.00 covenant by reason of a default under clause 6.00(1) – no similar suspension of rights and obligations is created in the event of the non-payment of rent.

[92] Whatever remedies the applicant may have arising from the alleged non-payment of rent, they do not include a suspension of the obligation to comply with art. 14.00 of the HBC lease for as long as the lease subsists and the tenant has rights under it.

(e) Conclusion

[93] In the result, I have concluded that the proposed TD lease, if carried forward, would result in a change to the Merchandising Plan that cannot be undertaken by the applicant pursuant to clause 14.00(3) of the HBC lease without the prior consent of HBC. I conclude that HBC has not waived its right to consent to the proposed change and that it has not unreasonably withheld its consent in all of the circumstances. The applicant has not established that it is entitled to any of the relief requested in the Notice of Application.

Disposition

[94] For the foregoing reasons, this Application must be dismissed. The respondent is entitled to its costs.

[95] I direct both sides to prepare and exchange with each other an Outline of Costs if they have not done so already. An Outline of Costs – ideally one prepared and exchanged between the parties prior to the hearing – provides evidence of the reasonable expectations of the unsuccessful party which is an important criterion to consider when fixing costs.

[96] While engaged in high-stakes litigation, both parties are also sophisticated businesspeople assisted by capable and experienced professionals. I expect them to view the matter dispassionately and make a good faith effort to resolve the matter of costs between them. Should they be unable to do so after two weeks, the respondents shall deliver their submissions on costs three weeks from the date of these reasons. The applicant shall respond within one week thereafter. I do not expect reply submissions on the matter, but if they are required reply submissions shall be short, directed solely to proper reply and delivered within three business days.

[97] Submissions shall be submitted electronically through my assistant who will be forwarding this decision to them. They should not exceed five pages in length excluding the outline of costs. A hyperlinked case list rather than pdf copies of cases is to be preferred.

S.F. Dunphy J. (electronically signed)

Released: February 16, 2021

Footnote:

[1] I refer here to the shape of the layout of the internal pedestrian corridors rather than the overall building which is an irregular rectangle in shape.