BHS takes formal steps to shed lease liabilities to become leaner and fitter

It has been widely reported today that BHS has issued a proposal to its creditors to place the company into a Company Voluntary Arrangement (CVA) as part of a formal restructuring of the business. Media reports suggest that the terms of the proposal, if approved by the creditors, will result in rent reductions being imposed on the landlords of 87 of its 164 stores.

BHS was sold in March 2015 for £1 by the Arcadia Group to Retail Acquisitions Limited, which has introduced a new approach to market including a food offering  and concessions in certain stores. It has been suggested in the media that the restructuring of BHS’s lease liabilities could lead to a takeover bid following recent reports of unsolicited offers being made for the business.

A CVA is a formal insolvency process between a company and its creditors which binds all unsecured creditors that exist at the time of the approval of the CVA, including those that may have voted against the proposal.

The arrangement does not have to treat all categories of creditors in the same way and, in recent years, CVA’s have been used as a tool to change the commercial terms of, or exit, a lease whilst giving the landlord very limited say in the matter.

This is reported to be the case with the CVA that has been proposed by BHS, where other categories of creditors are unaffected by the CVA proposal. It is understood that the proposal seeks a significant reduction of at least 75% in rent on 40 of the stores, with less significant lease variations on the other affected sites.

The outcomes of CVAs are not always successful, even once approved by the creditors. Recent examples of CVAs being proposed for similar reasons include Blacks Leisure, Focus DIY and JJB Sports. In these cases, proposals were approved by the creditors but the businesses still failed and shortly thereafter were placed into an alternative insolvency process.

The meeting of creditors to consider the BHS proposal is to be held on 23 March. In order to be approved, at least 75% (in value) of the creditors represented at the meeting must vote in favour of the proposal. All unsecured creditors will be entitled to vote at the meeting regardless of whether they are affected by the proposal or not.

The BHS landlords have a number of options to consider over the coming few weeks. If you are a landlord that is affected by this and would like advice on the options available, please contact Jeremy Willmont in our Restructuring & Insolvency team or Andrew Potts in our Real Estate team to discuss your options.