CVAs have had a bad rap of late, but could they benefit landlords and fashion retailers by addressing the problem of the UK’s floundering ‘zombie-like’ high streets?
A CVA (company voluntary arrangement) is an insolvency procedure where a company in financial trouble can enter into an arrangement with its unsecured creditors, to reduce or reorganise the company’s debts. CVAs can also change the contractual terms made between a company and its creditors, such as the provisions of its lease with its landlord.
There is widespread opinion, however, that CVAs are creating an unfair playing field for successful tenants, as well as prejudicing landlords. A recent wave of CVAs by household brands including Mothercare, JJB Sports and New Look, have focussed on reducing the number of high street stores they hold and procuring rent reductions. Perhaps the biggest shock has stemmed from House of Fraser’s announcement to close 31 of its 59 stores. The department store will also cut rents by 25% on a further 10 stores; all subject to approval of at least 75% of its creditors.
If House of Fraser are successful, how will this affect the behaviour of other retailers?
Fashion and homeware brand Next appears to be taking a stand by demanding a ‘CVA clause’ in their lease renegotiations. This would allow their stores’ rent to drop in accordance with any neighbours who receive a rent reduction through a CVA.
If other solvent retailers start to follow Next’s lead, the commercial property market could see a trend in falling rents and renewed discussions about upwards/downwards rent reviews. This would be great news for tenants, but have a huge significance for landlords. The latter could find themselves caught between the benefit of keeping premises in occupation and the negative impact of reduced rents on the value of their assets. Unsurprisingly, there is widespread alarm among landlords about the apparent overuse of the CVA process to mitigate tough conditions on the high street. This is resulting in an increasing number of landlords criticising the practice and lobbying for changes in legislation.
So will landlords stand for a ‘CVA clause’ in new lease negotiations? Real legislation change will take some hard bargaining. With CVAs seen as a loophole for sustainable businesses looking to renegotiate their liabilities, landlords and property industry bodies are calling for more regulation and an urgent government review.
Following House of Fraser’s announcement, the chief executive of the British Property Federation (BPF) has called for swift action. She stated “we are calling on government today to undertake a review, so that we can restore the CVA process to its original purpose”.
The CVA can be a tool used to benefit landlords and tenants in the face of ‘zombie’ high streets. However, if used for advantage instead of necessity, frustration within the property industry continues to grow, and other retailers are now considering their options.
The outcome of lobbying by the landlords and the BPF on the use and impact of CVAs will dictate their importance for landlords and tenants when negotiating lease terms. The ‘CVA clause’ might well be a non-starter, but it is certainly one to watch…perhaps from behind the sofa.