Retailing CVAs could face landlord challenge

House of Fraser may face stiff challenges from landlords on plans to halve the number of its stores and reduce rents as part of its proposals for a company voluntary arrangement (CVA), which is set to be put to vote in ten days’ time

There are reports that a group of about a dozen landlords is in talks with City law firm Bryan Cave Leighton Paisner (BCLP) over a potential move to block the CVA, which will require a minimum 75% of creditor approval at a vote scheduled for June 22.

According to the Times, the law firm reportedly told landlords they had a ‘very strong case’ on the basis that they were being treated unequally compared to other creditors, as they would be required to accept the financial loss of reduced rents imposed as a result of voting by creditors such as banks, bondholders and shareholders which will not share in the pain of rent cuts. Landlords are arguing that the voting structure makes it hard for their objections to be heard.

Revo, the industry body representing the retail property sector, said: ‘Every section of our membership has grave concerns about the advice being given to parties seeking to enter into such arrangements, and the detrimental effects felt not only by retail landlords, but by retailers not using this tactic, high streets and retail parks across the UK, and ultimately the wider economy.

‘It is beyond doubt that the process is being abused, with CVAs now being used solely to reduce rental liabilities and terminate lease agreements entered into by owners in good faith.’

Following the recent upsurge in CVAs, including the proposed House of Fraser deal, the British Property Federation (BPF) is calling on government to conduct an urgent review.

The BPF said: ‘We believe the process is now being mis-used, and this risks undermining the UK’s global reputation and deterring much-needed investment into our town and city centres, at a time when it is arguably more important than ever that the UK demonstrates it is open for business.’

The federation says it has identified a number of issues in recent CVAs which give cause for concern. They include a lack of transparency, unfair discrimination between different creditors, and ‘the lack of regulation to ensure CVAs are used appropriately and to drive good practice’.

Pending a review the BPF wants to see a number of stop gap measures. These include ensuring CVAs affecting more than five outlets are referred to an independent third party for review, potentially by the pre-pack pool. It also wants the insolvency profession to work with it to codify what is good practice in terms of voting rights and voting structures for CVAs.

Melanie Leech, BPF chief executive, said: ‘The CVA process is intended to be part of a comprehensive business recovery plan. Property owners, looking after savers and pensioners’ money, will support businesses who demonstrate this commitment but must protect those pensioners against unfair action that penalises their interests. 

‘Urgent action is required and we are calling on government to undertake a review, so that we can restore the CVA process to its original purpose.’  

Announcing its intention to file for a CVA, House of Fraser said the terms were a condition of a proposed agreement for Chinese fashion company C.banner International Holdings Ltd to acquire a 51% stake in the company and introduce ‘significant’ new capital. 

The CVA would see leases retained at current rents for 16 stores, with a reduced rent equivalent to 75% of the current rent at a further 10 stores. For the remaining 31 stores, a reduced rent, equivalent to 30% of the current rent would be paid for seven months, after which these stores will close.

Report by Pat Sweet

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