Many of the leases that

Hudson’s Bay

wanted to transfer to B.C.-based billionaire

Ruby Liu

for $69.1 million are now being returned to their landlords after an Ontario court rejected the retailer’s bid last week, people familiar with the matter say.

These landlords now face the challenge of filling up thousands of square feet worth of empty spaces across the country.

Toronto-based Primaris Real Estate Investment Trust, for instance, will be able to take control over five out of the 25 leases that the Bay wanted to sell to Liu toward the end of November, its chief executive, Alex Avery, said in an email.

“We plan to provide an update on our planning for several of these sites, including the potential for multi-residential and hotel developments on excess land (we will sell the land to others who will develop), as well as further retail developments (we will do these on our balance sheet),” he said.

He also said that Primaris has had “lots of leasing discussions” since those five locations are “highly sought after” with “very high” sales performance.

HBC, Canada’s oldest retailer, which filed for bankruptcy protection under the Companies’ Creditors Arrangement Act in March, is trying to pay back millions of dollars to its creditors.

Aside from seeking to monetize its leases, HBC also laid off all of its employees, sold intellectual property rights to

Canadian Tire Corp. Ltd.

and is still trying to auction off its artifacts.

The leases are in demand because as the main tenant, HBC was able to negotiate below-market rents with its landlords. As such, buying those leases would allow other companies to enjoy similar conditions. The sale of the 25 leases to Liu could have led to a recovery of more than $50 million for HBC’s creditors. About half of the 25 leases are located in Ontario, while the rest are in Alberta and British Columbia.

To monetize the leases, HBC went through an elaborate bidding process that began in March and lasted for several weeks. Aside from Liu’s bid, HBC also sold five leases for $5 million to a Toronto-based clothing retailer that owns brands such as Bluenotes, Suzy Shier and Urban Planet. This deal faced no issues and was approved by the Ontario court in August.

Finding another buyer to replace the 25 leases that Liu had agreed to take would be difficult in a struggling retail sector and take time, analysts say, one which HBC can’t afford as the longer the lease issue isn’t resolved, the more costs HBC is expected to accrue.

An additional 62 HBC leases received no bids at all.

Six of those properties, comprising approximately 661,000 square feet, belonged to Primaris. Avery said the company got those leases back in June, three months after HBC filed for bankruptcy protection. About two-thirds of that space has already been leased, with more discussions underway, he said.

“The tenancies are a combination of single-tenant replacements (and) subdivisions of Bay boxes into two or three stores,” said Avery. “We have a couple where we are likely to do a more costly and complex redemising of the space into several smaller stores, with the benefit of the higher cost being much higher rents.”

Overall, Primaris is expecting to spend about $125 million to $150 million to upgrade the eleven locations that used to be leased to HBC.

“There’s a healthy demand for space in the current retail property market,” said Avery. “This is largely due to the lack of any material new retail space development having taken place in the last decade, while the population has grown by about 17 per cent. The HBC locations are generally well located spaces … and they are generally located in the stronger malls.”

Josh Burleton, an associate director at

Oxford Properties Group,

which owns three of the 25 leases that were supposed to be sold Liu, said that the company will look to “explore and implement new creative solutions” at its malls and introduce “fresh, engaging retail concepts” for customers.

Alex Hennick, who heads A.D. Hennick & Associates Inc., a Toronto-based company that provides liquidation solutions and is not part of the HBC hearing, said he suspects that landlords involved will be forced to divide some of the large spaces that housed HBC stores and get multiple smaller tenants.

“In today’s retail strategy, it’s just very difficult to survive in massive locations unless they are consistently busy,” he said. It’s unlikely for another big retailer to come by and be the “big anchor” tenant in these spaces, he said.

While HBC inked the deal to sell 25 leases to Liu in May, the agreement faced opposition from several retail landlords, including Ivanhoé Cambridge Inc. and

Cadillac Fairview Corp. Ltd.

, which doubted her business plan and ability to run the stores. They took their objections to court in late August.

About two months later, Justice Peter Osborne of the

Ontario Superior Court of Justice

released a 48-page order that elaborated on why he agreed with several of the concerns raised by the landlords.

“The overall lack of experience at the leadership level represents a significant risk to the operational viability of launching and managing 25 large department stores in the contemplated timeline,” he said in the document “The composition of the proposed senior leadership team for the purchaser … gives me significant concern.”

Liu had proposed to start a national department store chain under her name. She committed to invest $375 million to launch the new stores and $120 million in store repairs and renovations over 12 months. She said she also planned to hire 1,800 people and would prioritize former HBC employees, and had already organized two job fairs in Toronto.

The landlords hired retail specialists to assess Liu’s business plan, which was eventually described as unrealistic and incomplete.

One such report made by one of those specialists said that “there is no existing precedent in any retailer, domestic or foreign, that has ever successfully opened the proposed number of department store locations in Canada within an 18-month period in anchor premises.”

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It also said that the projected revenues and margins were too high as Liu assumed that she would outperform HBC on her first day of operations.

While Liu committed to spend $375 million, that wouldn’t have been enough, lawyers representing the landlords said. For instance, retailers such as Target and Nordstorm invested $52 million and $59 million per store when they launched, while Liu’s commitment translated to $13.4 million, they said.

• Email: nkarim@postmedia.com