Recently announcing its restructuring plans, Debenhams has joined a long line of casualties for the UK High Street. With the culture of company voluntary arrangements (CVAs) still apparent, it is often the commercial landlords who find themselves left high and dry, faced with losing tenants and slashes to their rental income.
Opening an early dialogue with directors and administrators could prove an effective mitigation strategy, allowing them to cut losses early, and avoid CVA stress.
CVAs are a type of insolvency process used by struggling businesses to negotiate with unsecured creditors, including landlords, with the aim of improving the organisation’s financial position. As they are used when there is a belief that at least some parts of a business can be saved, one of their key benefits is the ability to keep the business trading as a going concern.
A perfect storm of factors, including rising property rates, changes in consumer behavior and an uncertain economic climate, have combined to create tough retail trading conditions in recent years. This has led to a significant increase in the number of CVAs, and it is likely that the trend will continue until retailers adapt to the present economic climate.
A growth in online sales is putting pressure on traditional stores, and the large spaces that were once required by shops are becoming less essential, meaning that retailers are paying for unnecessary space. In addition, the slowdown in the economy has led to consumers spending less in general, so businesses cannot afford to be wasting money on unused space.
CVAs can benefit retailers in a variety of ways, providing the opportunity to reorganise property portfolios and negotiate lower rental rates with landlords. Reducing the number of retail premises may appear to be negative, but this can help businesses to restore profitability by reducing overheads. Moreover, the flexibility that CVAs provide makes them more attractive than traditional insolvency procedures, allowing the business to continue trading and turning a revenue while the CVA is carried out.
However, while they can offer a lifeline for failing businesses, CVAs are causing a number of concerns for commercial landlords. The announcement of an administration often brings uncertainty, with a risk that they will lose their tenants. Unless administrators decide that their property is an asset they wish to retain, all their rental income could disappear in one fell swoop.
To minimise disruption to their rental income, dialogue must be opened with the directors of the tenant company as soon as there is a risk of the business going into administration. The details and extent of the situation can then be established, giving landlords time to prepare. Once a CVA is announced it is then vital that they contact the business’ administrators. Finding out information such as who the new buyer of the lease will be is important and allows them to conduct the right due diligence and consider whether they present a further financial risk.
Landlords should not feel hijacked by administrators and it is important to remember that they are not obliged to agree to the terms presented to them. If they wish to cut their losses early and remove themselves from administration proceedings, they can offer a deed of surrender.
Unlike forfeiture, which involves a property being taken by force, this is a consensual agreement with the business’ administrators that brings the existing lease to an end. It is worth bearing in mind that while a cooling-off period usually stops landlords from being able to end a lease and market their property while a CVA is carried out, this does not apply to deed of surrender agreements. Administrators may well be willing to accept such an agreement, which effectively gives them one less cost to worry about.
Cutting losses early lets landlords regain a level of certainty, allowing them to decide what to do with the unit and begin marketing it to potential tenants. The key advantage of this strategy is that it allows the rebuilding of a rental stream and the recovery of any losses that occurred at the start of the CVA process.
Early communication is key to riding out the wave of a retail CVA. Landlords cannot afford to be passive and must take a proactive approach to the situation, discussing concerns, finding out relevant information and seeking legal advice as soon as they are aware that a tenant is in financial difficulty. This will allow them to find new tenants and keep rental income coming in, whatever happens on the High Street in the years ahead.
By Vicki Simpson, real estate insolvency partner, Shakespeare Martineau