House of Fraser and the impact of administration on Commercial Landlords
As readers of the business pages will be aware, the department store, House of Fraser, is undergoing something of a seismic restructure at the moment.
Falling sales and high overheads indicating that the traditional business model, used by the group is no longer viable. Following a failure to find a solution to its problems the House of Fraser collapsed into administration and was subsequently bought out of administration by entrepreneur Mike Ashley.
Mike Ashley has an existing track record of working in retail during his ownership of Sports Direct he has created a reputation for himself with his direct managerial style. As he looks to restore profitability to the business, Mike Ashley was quick to blame what he referred to as greedy landlords for preventing a wholesale restructure of the business to bring it back into profitability
By buying the company out of administration, Mike Ashley has been able to pick and choose the assets he wants to take on. In what is called a pre‑pack administration, Mike Ashley is able to cherry pick the assets of the business, leaving the liabilities and unwanted assets behind.
Whilst the collapse of the House of Fraser will no doubt have a significant effect on its employees and shareholders, it will also have a dramatic effect on the landlords who own the buildings which are let to the House of Fraser under tenancy arrangements.
When businesses like the House of Fraser fall into administration, the difficulty that landlords face is that they own the generally large buildings containing the stores and will have invested many millions of pounds in both the purchase and the maintenance of these buildings. Many of the buildings will be owned by institutional landlords, often pension funds, which are required to provide a return to the pension holders who will ultimately suffer in the event that rents are reduced or indeed not paid.
Where a Tenant company goes into administration, the landlord is faced with the dilemma of either terminating the lease or accepting a significant reduction in the rent that they receive. This in turn makes it difficult for landlords to pay any mortgages or loans which they have secured over the buildings or, in the case of the pension provider, unable to provide the returns to the pension fund.
Having a tenant go into administration creates enormous difficulties for landlords. Whereas prior to the administration the landlord is largely in control of negotiating the terms of the lease, the administration means that the tenant, through the administrator, is largely in control, being able to decide if they want to terminate the lease or, if they decide to stay, what the terms of the existing lease are going to be.
Administration occurs when the company is unable to pay its debts and an administrator is appointed to run the business. The administrator, who must be an insolvency practitioner, must either wind up or keep the business going until a buyer can be found.
Under a pre pack administration the administrator is able to sell the business to a buyer who does not have to take all of the business but only the parts that they want, the remainder of the business then being wound up and any creditors will receive only the return from the winding up.
Since the creditors of a business include landlords, as well as suppliers and commercial creditors, the insolvency practitioner appointed under the administration is able to approach the landlords to renegotiate the terms of the lease, at which point the landlord can either accept the terms being offered or not. If the landlord rejects the terms on offer, the administrator can terminate the lease. From a landlord’s perspective, this means they either get a reduced rent now with the promise of potentially better returns in the future, or nothing now and take their chances on being able to re‑let the premises, which may not be easy when, as in the case of the House of Fraser the premises are designed for use by a single retailer.
Under the administration process, the administrator can disclaim the lease, which means that the lease is terminated by the administrator with no possibility of the landlord receiving rent and very little hope of recovering any rent arrears. Alternatively, it could be that the lease contains provisions which allow the landlord to terminate the lease in the event of the company falling into administration, in which case the landlord can terminate the lease and may themselves wish to re‑let the premises on terms which they may feel are more beneficial.
In the case of the House of Fraser, Mike Ashley is able to decide not only which stores to keep open, but also renegotiate the leases of the remaining stores. It looks as if the landlords will suffer much of the burden for the restructure of the company and, like all landlords, they will need to consider whether the House of Fraser offer sufficient returns to continue to be tenants of their properties, or if they would prefer to find new tenants in what is possibly the most difficult time for the high street.
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