A group of landlords is going to court over the rescue plan for House of Fraser saying it treated them unfairly.
In June, House of Fraser creditors agreed to a company voluntary arrangement (CVA) – a rescue deal under which 31 stores were closed and rents at 10 other stores were slashed by 25 per cent.
The landlords said there was “unfair prejudice” against them in this action.
House of Fraser said it had not received any formal legal notice from the landlords about going to court.
“On the assumption that a challenge is filed in court, whilst we are disappointed, we look forward to robustly defending our position and we are confident that this will not affect our commercial plans,” a House of Fraser statement said.
The legal challenge is not expected to affect the House of Fraser rescue plan.
Advisors to the landlords said in their statement: “It is our view, and that of our legal counsel, that landlords have been disproportionately affected during this CVA process; not only compared to other creditors, but also to how they could have been treated if alternative routes to rescuing the business were fully explored.”
Following the rescue deal China’s C Banner, which is also the owner of Hamleys, took a 51 per cent stake in House of Fraser.
C Banner also pledged to invest £70m in the remaining department stores.
Mark Fry of Begbies Traynor and Charlotte Coates of JLL, who have been working together to advise House of Fraser landlords throughout the CVA process, said: “Having worked with Mr Philip Holden and drydensfairfax solicitors and based upon opinion from legal counsel, our group believes that certain landlords have been unfairly prejudiced during this process and that there have been alleged material irregularities in the implementation of House of Fraser’s CVA. Our clients have therefore taken the decision to formally file a legal challenge to the CVA today, ahead of the 24 July deadline, to protect their interests and seek to ensure that landlords are not unfairly treated in the same way in future CVAs.
“We strongly believe it to be unjust for the existing shareholder in House of Fraser to receive £70m of value, the details of which were not communicated initially, whilst certain landlord creditors are shouldering the financial impact of the process. It is our view, and that of our legal counsel, that landlords have been disproportionately affected during this CVA process; not only compared to other creditors, but also to how they could have been treated if alternative routes to rescuing the business were fully explored.
“As a group, landlords experienced a complete lack of meaningful engagement and transparency from the outset of the House of Fraser CVA process, despite repeated requests for details on how the company is expected to trade over the next seven months under the CVA. To date, no information has been provided to our landlord group, with no guarantees that the business will continue, leaving landlords unable to reasonably assess the likelihood of success or otherwise of the Company’s future rescue plan.
“CVAs were designed as a means to rescue a business, not simply a tool to shed undesirable leases for the benefit of equity shareholders. They should set out a clear plan for the sustainable future of that business and the proposals should not be disproportionately detrimental to or prejudiced towards a targeted group of creditors. Our landlord group believes that House of Fraser and its advisors have failed on both counts.
“It is our collective view that the retail CVA process in the UK has become fundamentally flawed and needs correcting. Applying a 75 percent arbitrary discount to the value of landlords’ claims has no basis in law and impacts the likely outcome of the vote given that those landlords who will lose out have their voting rights and ability to object or negotiate severely curtailed. The application of the discount clearly means that dissenting voices are more easily silenced.
“As commercial landlords in the retail sector are often pension funds, representing the retirement income of the man on the street, we believe it is important that the recent approach to CVAs is tested in the courts rather than be allowed to further prejudice landlords while undermining the value and attractiveness of UK real estate as an asset class.”
Commercial property owners are often pension funds, so the landlords argue that unfair treatment of them has a negative impact on retirement incomes.