Landlords use CVAs to reassert leverage over retailers
Company founder and owner Peter Simon is said to be looking at injecting £25m capital into the business with a further £9m immediately available to protect the 271 stores in the chain. As part of the CVA it is reported that he is looking to obtain rent reductions for approximately two thirds of these.
Pressures stemming from the rise in online shopping, the burden of fixed business rates, minimum wage rises and other cyclical factors can all come together to form a perfect storm of unfavourable conditions for retailers, both big and small.
Mothercare, New Look, House of Fraser, Toys R Us, Giraffe, Select and Byron have all entered into CVA’s in the past 12 months with the Arcadia Group – made up of Miss Selfridge, Topshop, Dorothy Perkins, Evans, Burton and Wallis – already in discussions with creditors about their next move which will probably include a CVA and rent reductions.
We have already written in depth about how effective CVA’s are for large retail companies but the mood music appears to be changing among landlords and property owners.
Melanie Leech, Chief Executive of the British Property Foundation (BPF) said: “It’s been disappointing to see a growing number of retailers seeming to take a short-term approach to misusing the CVA process, putting at risk our shared ambitions for vibrant town and city centres by harming the relationships between retailers and property owners, and undermining trust in the legal system that sets the framework within which we all operate.
“CVAs are now becoming a tool to simply shed underperforming assets within a portfolio – to enable a tenant to walk away from their lease liabilities – without that business tackling its wider challenges. This CVA bad practice is unfair and undermines those businesses who are acting in good faith, and it must stop.”
The BPF recently held a seminar on the impact of CVA’s following their rapid increase in the sector in 2018.
Among the points covered in the agenda included looking at the CVA from the landlord’s perspective. They heard testimony about what they saw as a stark injustice that rent rates were rarely the cause of a retailer’s financial difficulties but were increasingly seen as a solution to them. Also that retailers would consult with equity and debt holders to work out a restructuring plan followed by unsecured creditors leaving no time for landlords to engage in the process.
They also advised landlords that they should take a more robust approach when dealing with insolvency practitioners.
This includes requesting more information from them in the 14 day window between the provision of the creditors report and the CVA approval meeting; attending and asking questions at the CVA approval meeting and refusing to confirm in advance their position regarding the CVA ahead of this meeting.
The BPF also issued a list of ten “red flag clauses” in CVAs that they advise their members to watch out for and challenge if they appear. These include:
- Moratorium against enforcement of tenant’s covenants and/or full and final release of tenant’s liabilities other than CVA rent
- Restrictions on termination rights given to landlords in CVA, particularly by time or resulting in a full and final release
- Company’s right to terminate leases or trigger rent review at the end of the CVA
- Removal of the company’s obligation to given an authorised guarantee agreement (AGA) on assignment
- Upwards only rent reviews rewritten
- Dilapidations compromised to % rent (or another fixed sum)
- Landlords’ claims against compensation fund discounted by 75%
- Compensation fund limited to the first 3 years’ profits or less
- Rental discounts for the whole of the term
- Rental discounts surviving termination of the CVA
Retail accounts for some 3.2m jobs in the UK and Usdaw, the shop workers’ union has called for the government to adopt an industrial strategy for retail.
Until this happens or other legislation is brought forward to address this increasingly important and prevalent issue, the use of the CVA by retailers will continue to be closely scrutinised by all industry stakeholders.
The CVA remains one of the main vehicles for companies considering administration but it is not to be entered lightly. If you are considering a CVA for your business stop and talk to one of our advisors first. We have years of experience in overseeing the process and can give you a full, frank and honest assessment of their suitability for your unique business circumstances.