Rising business rates, internet shopping and a generally uncertain economy is wreaking havoc in high streets and other retail centres, with the worst hit being fashion retailers and restaurants.
In 2018 alone we have seen CVA’s approved for the casual dining chains Byron Hamburgers, Jamie’s Italian, Prezzo and Carluccio’s and retailers New Look, Mothercare, Carpetright and House of Fraser. Not all have been a success with BHS, Toys R Us and House of Fraser having CVA’s approved only to enter into Administration a short time later.
2018 has however been the year of the Retail CVA and in this article we set out why the shift in process and how the Retail CVA works. Most retail CVA’s have similar themes in their drafting;
Leases on loss making outlets are terminated
Reduced rents are sought and usually obtained on marginal sites with discounts of up to 100% in some cases
The rent payment cycle is moved from quarterly in advance to monthly.
Landlords are generally receptive as it is better to receive a discounted rent, than have the empty unit handed back and be liable for the business rates. On a recent case of KRE’s a 75% reduced rent on three units was negotiated, as the landlord avoided over £500,000 of business rates, paid by the company in the first year of occupation.
The treatment of landlords for voting purposes has also been the subject of much debate. If a CVA receives the requisite 75% majority of the vote by creditors present in person and by proxy, and voting on the proposal is not opposed by more than 50% of unconnected creditors, it will be binding on all creditors. A landlords claim for voting purposes is usually limited to any arrears and an amount for future rents (2-3 years rather than the term of the lease to allow for re-letting) plus an estimate for dilapidations. The debate has centred on the leases being retained having the same voting rights as those being discounted or surrendered. In some cases therefore the “good property” landlords have outvoted the “bad property” landlords, even through the “good property” landlords are excluded from the CVA going forward.
The volume of landlord driven CVA’s has however caused consternation and resistance is beginning to mount. The British Property Federation (“BPF”), which represents many institutional landlords, has requested an urgent government review of Retail CVA’s. One concern is that certain proposals appear to have been issued where the tenant is not necessarily facing Administration, but as a means to shed bad leases. Our view is that this is unlikely in the majority of cases.
Rival retailers have also expressed concern on the grounds that it gives unfair advantage to competitors in CVA. In certain cases the fashion retailer Next is insisting that its leases contain a provision under their lease that a CVA rent reduction granted to a neighbour would trigger a similar reduction to Next.
Whilst it is possible that CVA landlords will start voting against CVA’s, this is unlikely as they generally are a collection of individuals who seek to minimise the impact upon themselves. Voting down a CVA will result in Administration and returned units, often with no or minimal returns and therefore it’s a turkeys voting for Christmas scenario.
At KRE we have recently handled a 32 unit business which is now profitably trading from 16 units, several of which are still on discounted rents. The principles are the same for the multi site household names as the 2-6 unit businesses and therefore if you have retail clients who are finding it difficult we would be happy to meet to discuss without charge. On one recent small case the suggestion of a CVA resulted in a landlord accepting a surrender for a relatively small sum and we can assist in similar negotiations if required.
T: 0118 947 9090