Legal action against House of Fraser could stem the wave of company voluntary arrangements (CVAs) by high street retailers, property experts have told Drapers.
A group of landlords filed a petition in the Scottish Courts on Friday 19 July challenging the CVA on grounds that it was unfairly prejudiced against certain creditors.
Although the case has been filed in Scotland, it is expected that the outcome of the case will carry weight in English courts.
The landlords, who are being advised by Begbies Traynor and JLL, feel aggrieved that existing shareholders of HoF “receive £70m of value, the details of which were not communicated initially, while certain landlord creditors are shouldering the financial impact of the process”.
Mark Williams, president of retail property organisation Revo, said the challenge will be closely scrutinised: “Without a shadow of doubt, those companies considering CVAs as an easy option will think twice, and will want to see the outcome of this legal decision. It is drawing a line in the sand to bring a temporary halt to [CVAs].”
Williams said the legal action would set a precedent in terms of how creditors’ debt is calculated for CVAs, and test the assumptions used to value what any retailer owes landlords from rent and lease commitments. Many landlords currently feel their debt is undervalued, which has an effect on their own value as creditors within any CVA action.
One property adviser said the nature of the HoF CVA made it a prime candidate for challenge: “In the case of HoF, with so much of the CVA being unclear in nature, and equity being taken out of the business at the same time as rents are cut, landlords feel obliged to challenge it.”
Both parties have 21 days from the date the legal action was launched to submit evidence to the court. The two parties are expected to hold discussions over the terms of the CVA in coming weeks and it is thought that the court could hear proceedings in three to six weeks’ time.
In a statement, HoF said: “We note the statement made by Begbies Traynor and JLL on behalf of a group of landlords, but at this stage we have not received anything formally. On the assumption that a challenge is filed in court, while we are disappointed, we look forward to robustly defending our position and we are confident that this will not affect our commercial plans.”