Experts are forecasting 2019 to be a record year for the number of voluntary insolvencies by high street retailers, with more and more retailers turning to company voluntary arrangements (CVA) to avoid collapse. Retail property specialist, Anna Turnell, investigates the progressively uncertain climate for retail landlords, the increasing use of company voluntary arrangements (CVA) and how landlords can best adapt to the current retail environment.
2018 was dubbed ‘the year of the CVA’, with high profile retailers like New Look, House of Fraser and Homebase all making use of company voluntary arrangements in an attempt to survive the challenging high street climate.
So far, 2019 shows no signs of change. Monsoon and Paperchase have had their CVA applications approved within the last two months, and Topshop owner Arcadia Group is predicted to begin the CVA process soon. Debenhams also joins the list this month after having it’s CVA application approved, negotiating rent reductions of between 25% and 50% on 127 stores across the UK.
What is a CVA?
A CVA is a legally binding agreement made between a company and its creditors. The agreement facilitates the repayment of the company’s debts over an agreed period of time, usually three to five years and often at a reduced rate, whilst allowing the company to continue trading as normal.
CVAs have become increasingly popular as a rescue tool for companies with a viable future but who might be struggling with historic debt.
According to the Sunday Times, 75% of Debenhams stores earmarked for closure are owned by small landlords and councils, who are often the biggest losers in the CVA process. To prevent losing valuable tenants, smaller landlords are effectively being forced into cutting their costs.
Because of this, the CVA process has come under increasing criticism. Many believe that tenants are essentially being allowed to save their businesses at the expense of their landlords. This is particularly frustrating for landlords when the CVA process isn’t always successful in restructuring a tenant’s company. This week, fashion retailer Select announced that it has officially fallen into administration, putting at risk 1,800 jobs across around 170 stores. This is despite undergoing the CVA process last year, seeing their rent prices slashed by up to 75% in some stores.
Adapting to the climate
Being proactive can help landlords to keep one step ahead of the trend. These are a few ideas of what retail landlords can do:
• Communication: Having excellent communication and good relationships with tenants means compromises can potentially be agreed before a CVA application is even made. Sometimes a short-term concession on the part of the landlord (such as a period of reduced rent) can ensure the long-term survival of the retail client.
• Flexibility: Offering shorter term licences to occupy or leases with regular mutual break clauses can be beneficial to both tenant and landlord. It would be helpful to smaller/independent retailers who cannot commit to being tied into a lease long term, whilst also giving landlords the opportunity to end a lease for a larger or longer-term retail client.
• Provide a commercial incentive: Allow tenants to pay rent monthly rather than quarterly. This can help relieve the burden of finding three months of rent in advance, which can often cause tenants cash flow problems. It may also be beneficial to allow rent reviews to reflect the current market, rather than the traditional ‘upwards only rent review’, which can be off-putting for tenants.
• Think outside the box: Review floor space and consider breaking up large premises into smaller units so that at least part of a property can be let, if not the whole.
• Increase footfall: Consider food outlets, coffee bars, event space and other attractions to increase traffic and help support your retail tenants. Also, make sure your marketing strategy is strong; ensuring all different ages and demographics are captured will help to drive footfall.
• Pop up shops: These are an increasingly popular short-term solution for landlords, covering the basic overheads while also effectively advertising the space to potential new long-term tenants. Other towns have seen landlords giving units over to charities or events companies to create a short-term presence and increase footfall.
• Keep up with the climate: Research conducted by PwC found that the top 5 net riser categories in 2018 were sports and health clubs, bookshops, ice cream parlours, vaping and tobacco shops, and cake shops/patisseries, showing there has been a move towards entertainment and indulgence and away from retail.
How can we help?
These are undoubtedly tough times but, with some sensible and commercial legal advice, landlords can strike the right balance between attracting retail tenants and retaining sufficient security.
Lodders Solicitors can talk you through the various options for break clauses and other flexible lease terms and put in place licences to occupy or leases that are structured effectively and suit your needs. The days of long lease terms with no breaks clauses have most definitely gone, but it need not all be doom and gloom.
For specialist legal advice on your retail property portfolio, contact Anna Turnell.