October 2018
Companies are supposed to pursue CVAs only when the alternative is certain collapse. But we are seeing clear evidence that retailers are instigating CVAs to railroad landlords into rent cuts and providing an opportunity to simply dump unwanted shops. CVA comes into force when 75% or more of the company's creditors, which includes their landlords, vote in favour of the proposal. Increasingly we are seeing these proposals being limited to rent reductions and lease terminations with little evidence that management are doing anything else to reduce debt or put in place prudent measures to strengthen the viability of the future business.
Many landlords now see the CVA process as a cynical tool to force them to prop up the balance sheet of retail businesses that have over reached themselves. The carefully choreographed process often puts the scale of debt owed to non-landlords at such a magnitude that the landlords vote is utterly irrelevant. They face a fait accompli on the vote yet frequently bear the brunt of the outcome.
GCW’s client Frogmore saw a stark example of the broken system when retailer, New Look sought to renegotiate the rent on its store in the Stratford Centre, East London. New Look had announced plans to shut 60 of its 593 shops and whittle down the rents of 393 more and the Stratford store was classified as one where an immediate rent cut of 40% was needed to maintain its viability.
Rather than accept a rent reduction from £200,000 to £120,000 a year, Frogmore decided to take back the lease and relet the unit to Iceland at the current rent level. Once New Look’s bluff was called, it made a counter bid at £210,000 pa. It quickly became clear that New Look did not need the rent cut and the CVA was being used to secure more favourable commercial terms. It is important to note that New Look was playing by the rules and the levels of rent being sought were based on third party advice and adapted by accountants to produce pre-determined outcomes.
It is clear that the CVA system is having a destabilising impact on the retail property market. It penalises solvent retailers, creates more retail vacancies, and hits pension and investment funds hard. It also heightens tensions between landlords and tenants when closer collaboration is critical to protect the future of bricks and mortar shopping.
A principled CVA process could and should be an effective way to protect ailing businesses. Individual landlords such as pension and investment funds who control much of the UK’s retail property sector need to join industry associations and take a public stand. As resistance gathers pace, they have a real opportunity to speak up and play a key role in influencing the conversation and force a change to a well-intended but abused rescue tool.