Does the House always win?

Published 15 June 2018

On June 22, creditors of House of Fraser will vote on CVA proposals in the culmination of a bid to restructure the retailer which has hit headlines in both property and mainstream news. The proposals would see 31 of House of Fraser's 59 stores closed, and a 25% rent reduction in respect of a further 10.

KPMG, advising House of Fraser on its restructuring drive and poised to act as the CVA supervisor, has described the proposals as giving the business "a vital lifeline to avoid administration". A £70m injection of cash is to be made available to House of Fraser as part of a buyout by the Chinese company C.banner – provided that the restructuring of the business via the CVA goes ahead.

A pushback from landlords was reported almost as soon as the news of the CVA broke. The British Property Federation (BPF) has issued a statement calling for an urgent government review into CVAs. Coming on the same day as the formal announcement of the House of Fraser rescue plan, it has focused attention squarely upon the use – or possible misuse – of the CVA process.

The BPF's concerns echo those of its members: a lack of transparency in the process, unfair discrimination between creditors, and lack of regulation. The message is clear. Landlords may be prepared to support CVAs as an emergency measure to avoid retailer collapse, but are less keen on the process being used to terminate or re-write long term contractual obligations when the business (together with its other stakeholders) is set to benefit from a substantial liquidity boost in addition to a marked reduction in its property costs.

This is really a question of fairness between creditors and stakeholders in the CVA process. Landlords are often at an inherent disadvantage in the way that the voting is conducted. CVAs must be approved by 75% of creditors by value, yet liabilities for future rent are often valued at a nominal £1.

CVAs in the retail sector – an increasingly common phenomenon – can adversely affect the rights of landlords in a unique way. Not only can rent be drastically reduced, and stores abandoned, but the rights of landlords to deal with their property assets are suspended in accordance with the terms of the CVA. If the company needs to trade from a store for a period before abandoning it (as is proposed by House of Fraser) then the CVA will ensure that the landlord cannot take steps to terminate the lease during that period. In contrast, should the company go into administration or liquidation the landlord may still control the lease within a statutory protection.

It is undeniable that the retail sector is undergoing a period of intense turmoil and change. But is the CVA process being used in a way that it was properly intended? Could it be said that some retailers are taking unfair advantage of the insolvency regime? With pressure building from landlords and the BPF, it may be that the current use of the CVA process will come under legislative scrutiny, or one or more disgruntled landlords may decide to take legal action to challenge the outcome on the grounds of unfair prejudice. Thus whatever the outcome of the House of Fraser vote, it may be that its CVA proposal could turn out to be a high water mark for CVAs.