What does it mean for landlords?
A growing trend for companies feeling the pinch is to adopt a Company Voluntary Arrangement (CVA). Currently favoured by struggling retailers, this tactic has come under fire as critics have claimed that the arrangements have resulted in, directly or indirectly, the closure of nearly a thousand shops since 2017. Nevertheless, 2019 is set to be a record year for CVA adoption.
The struggle of retailers up and down the British high street is well documented. Several are in debt and looking for methods to cope long-term. A CVA allows a company in debt to continue to trade and reach an agreement with creditors regarding repayment over a period of time, including negotiating with landlords for rental reductions. Despite being designed as an emergency last resort, CVAs are growing in popularity as a restructuring strategy, with top retailers including the Arcadia group, Carpetright and Homebase utilizing the tactic.
Retailers will often shut down unprofitable stores as part of the arrangement. Additionally, the terms of a CVA will often not only allow tenants to exit a lease but can lead to tenant’s asking landlords if they will accept rent reduction whereby the tenancy will remain in place at a lower rent. Monsoon and Accessorize’s CVA proposal included asking landlords to reduce rent on most of its stores, with a promise of a share in future profits for Landlords who agreed.
Reductions are often from 20 to 75 percent, although in some instances Landlord’s have been left receiving a 90% reduction, as was the case for some House of Fraser landlords. Research has shown in most cases landlords do help struggling tenants and accept the reduction rather than being left with an empty unit, looking for a new tenant and potentially being liable for business rates.
Patience among landlords is being tested and landlords are being empowered to collectively resist CVAs when they are being implemented as a quick fix in non-emergency situations. In a letter to the House of Commons select committee on housing, communities and local government, Revo, a representative of retail owners, warned against the potentially grave consequences of the growth of CVAs and blamed financial advisers.
Where landlord’s do accept this form of restructuring, which results in a lower rent, it can lead to resentment among tenants who remain tied to the original rent agreed in their lease. Fashion brand Next is said to be negotiating a “CVA clause” into its leases, whereby its own rents must be reduced if any of its landlords’ agree to a CVA for its other tenants.
Ultimately, a CVA may not be the best sustainable solution to debt problems. Research by property advisors Colliers International has found that businesses that resort to CVAs alone were successfully trading half as often as those who opt for going into administration.