House of Fraser settles landlords’ legal challenge

House of Fraser landlords

The legal challenge filed by a group of major landlords against House of Fraser over its controversial CVA has been settled out of court.

The agreement – the terms of which are confidential – will now ease some of the pressure facing the embattled department store as it continues to seek a rescue deal.

House of Fraser’s CVA, which was approved by creditors in June, includes plans to close 31 of its 59 UK and Ireland stores, reduce rent on 10 that will remain open, relocate offices, and slash 6000 jobs.

Within weeks of the CVA being approved, lawyers representing the group of landlords filed a legal challenge against the retailer in Scottish courts.

The landlords had argued that they were being unfairly prejudiced by CVA process.

The court hearing was originally set for August 14.

Mark Fry of Begbies Traynor and Charlotte Coates of JLL, who have been advising the group of landlords, confirmed that they will now withdraw their legal challenge as part of the settlement.

“Although we will not have our day in court, we are pleased with the outcome and hope that our landmark legal challenge sends a clear message to any other companies considering a CVA, on the importance of transparency and fair treatment for all creditors throughout a CVA process,” Fry and Coates said in a statement.

“Landlords are always willing to enter into a proper dialogue with companies and their advisers with the aim of rescuing a business.

“However, the retail CVA process in the UK has become increasingly misused and prejudiced against landlords and needs correcting.

“CVAs were designed as a means to rescue a business, not simply a tool to shed undesirable leases for the benefit of equity shareholders.

“It remains our belief that applying a 75 per cent arbitrary discount to the value of landlords’ claims is not the market norm and has no basis in law.

“We believe that thanks to our actions, landlords in future CVAs will be in a far stronger position to challenge what we regard as unfair treatment and demand greater transparency from companies and their nominees from the outset.”

A spokesperson for House of Fraser’s CVA supervisors from KPMG said: “The joint supervisors can confirm that there has been a settlement to the legal challenge to the House of Fraser CVAs.

“This commercial settlement has been reached to avoid the costs of litigation, and allows the companies to continue its investment process without the CVAs being subject to the risk of further legal proceedings.

“The joint supervisors will continue to monitor the progress of this investment process and will update creditors as appropriate.”

The news comes amid a tumultuous period for the department store chain.

Chinese investment firm C.banner, also the owner of toy retailer Hamleys, had promised an investment of £70 million for House of Fraser, which was conditional on the implementation of its CVA that was approved by creditors in June.

House of Fraser’s current majority owner Nanjing Cenbest had also signed a memorandum of understanding that C.banner would purchase 51 per cent stake in the department store after the CVA process was complete.

However, C.banner withdrew its planned cash injection last week, just days after it said it would delay it until October due to the landlords’ legal action, which was filed on July 20.

C.banner’s withdrawal also came a day after influential credit ratings agency Moody’s judged House of Fraser to be in technical default on its loans, downgrading it from the “very high risk” rating it received in December.

Meanwhile, reports have indicated that House of Fraser has held talks with various investment firms over the last week or so, including turnaround specialists Alteri Investors,  over a potential rescue deal.

Executives from Mike Ashley’s Sports Direct and Edinbugh Wollen Mill chief executive Philip Day are also thought to be talks about possible rescue deals.

For Ashley – who already has an 11 per cent stake in House of Fraser – the banks acting for the retailer reportedly asked his executives to consider providing a £50 million loan.

It’s thought that the result of the legal challenge would now pave the way for the department store to secure the new funding it urgently needs to pay for its quarterly rent bill of nearly £25 million in late September and to make sure there is enough stock for the upcoming Christmas trading period.

If it is unable to find a new backer, it could fall into administration in what could be the biggest failure on the high street since BHS.

House of Fraser has already placed accountancy firm EY standby to handle a potential collapse, if it comes to it.

Meanwhile, the Pensions Regulator said it was closely monitoring the retailer, which has two defined pension schemes.

Chief executive Alex Williamson previously described the CVA as House of Fraser’s “last viable” option to stay afloat.

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