House of Fraser landlords up in arms over CVA rent cuts

Company voluntary agreements are being used by a growing number of struggling high street chains

A group advising House of Fraser landlords has hit out at proposals that would see them “take all the pain” while shareholders benefit from £70m pumped into the ailing department store chain.

House of Fraser is proposing to close of 31 of its 59 stores, and as part of a rescue plan is seeking creditors’ permission to slash rent bills at these outlets, as well as at some of those not being axed.

This would be done under a company voluntary arrangement (CVA), a controversial form of insolvency being used by a growing number of struggling high street chains. Typically, property owners are asked to accept lower rents to help a tenant avoid financial collapse – something many landlords say amounts to companies attempting to wriggle out of their rental obligations.

Landlords are particularly unhappy about the way the CVA process often allows creditors such as banks, bondholders and shareholders who won’t share in the pain of rent cuts to vote to impose new terms on a minority of creditors.

The House of Fraser store closures are a condition of a deal that would give control of the department store chain to the Chinese owner of Hamleys, C.banner, which has committed to injecting £70m of fresh capital into the retailer once the restructuring has been carried out.

However high street landlords have already been railing against what they say is the misuse of the CVA process, and this latest episode has added to their anger.

Charlotte Coates is a restructuring specialist at property advisory firm JLL, which is working with consultancy Begbies Traynor to advise a group of House of Fraser landlords through the CVA process to negotiate a better deal for them. That C.banner is paying for new shares is proving particularly controversial.

Coates said it was time to ask whether it was unfairly prejudicial to have a situation where a business that had gone wrong was getting a £70m payment, while at the same time “asking landlords to take all the pain” via reduced rents. She said this would not be happening if the business was going into administration, and added that the group was taking legal advice.

Ian Fletcher, director of policy at the British Property Federation, the landlord industry group, pointed out that House of Fraser had previously sold some of its stores on sale and leaseback deals. For example, a 1999 deal with British Land raised £147m and put 15 stores on 40-year leases (it is understood that only two stores remain in British Land’s portfolio).

“Some of those landlords will be particularly aggrieved by the CVA … House of Fraser got the money, but that was in return for taking a lease and honouring it.”

Fletcher said there was “a feeling that some of the recent CVAs are not proper CVAs. A proper CVA and restructuring would look at all the different aspects of the business … There’s a big concern that these exercises are just shedding lease liabilities and not doing a proper holistic restructuring of the business.”

He added that by focusing on property, it may be that the CVA “is just putting off the day when the business will go into administration”.