UK: The Changing Landscape Of Retail CVAS – Are Landlords Taking Back Control?

Last Updated: 24 July 2019
Article by Devinder Singh

There has been an influx of company voluntary arrangements ("CVAs") in recent times, as retailers fight to rescue their UK high street stores. Retail CVAs accounts for the highest proportion of CVAs at 19%. As more and more CVAs are approved, we consider some of the recent trends seen in the retail sector which showcase the flexibility of a CVA and reflect the demands of landlords whose support is vital to the continuing viability of a business.

What is a CVA?

A CVA is a rescue procedure whereby a company in financial distress and its creditors enter into an agreement to compromise the debts and liabilities of the company. 2018 was coined the “year of the retail CVA”, as Toys “R” Us, Prezzo, House of Fraser and Homebase (to name a few) all fell victim to the troubles of the UK high street.

In order for a CVA to be approved, a retailer must secure at least 75% creditor approval and as landlords make up a large percentage of unsecured creditors, their support is usually necessary for approval and the ultimate success of a CVA. However, securing landlord support can be a difficult scale to balance.

Typically, a retail CVA will treat landlord claims differently depending on a stores’ financial performance and/or the strategic importance of the premises. So, for example, landlords of performing sites that are key to the future success of the business will be paid rent in full; underperforming sites (which could be commercially viable) will be paid a reduced rent and underperforming sites which are not viable will be closed.

The flexibility of a CVA allows unsecured creditor claims to be compromised in any number of ways to best support the future success of the business. There is no longer a “one size fits all” approach, with CVAs becoming more sophisticated than might historically have been the case. The terms of a CVA can be tailored not just to a class of creditor (i.e. landlords) but also to reflect the past performance and expected future trading of individual stores. The Paperchase CVA, for example, separated landlords into six different categories and rent was compromised on different terms depending on the category.

Sharing the pain and the gain

Improved returns on improved performance: upside sharing

Debenhams, one of the latest stores to propose a CVA, sought to reduce rents in 105 of its stores (some by 50%) and still the proposal received overwhelming landlord support. Why? Perhaps because recent proposals have seen a move towards risk sharing between the company and landlords.

In the Debenhams CVA, for example, the compromised leases included mutual landlord and tenant break clauses enabling either the landlord or tenant to terminate a lease early. It is also understood that the proposal included a £25 million ring fenced fund that will be available to creditors, whose claims were compromised as part of the CVA, if the business sees growth in the future.

A compromised creditor fund capped at £3 million, was also included as part of the Homebase proposal.

The prospect of sharing in the gain, if business improves, is perhaps the best way to secure support. It makes sense, why should creditors who are asked to support a business during a distressed trading period not then share in the upside if trading improves?

Upside sharing is not completely new. We have seen previous examples of this in the Paperchase CVA.

Under the Paperchase proposal landlords will receive a guaranteed base rental income of between 35% to 80% (payable regardless of sales) which is then "topped up" based on the performance of individual stores. If turnover improves, the return to the landlord improves.

Where a retailer’s sales are seasonal, a turnover CVA rent gives a business the headroom it needs to trade profitably outside of its peak session by reducing rent to a sustainable all year base rent. A top up rent therefore allows a landlord to share in the seasonal spike in trading performance.

The Arcadia CVA (approved on 12 June) offered landlords a 20% stake in the company.

Whilst landlords take the pain in the form of compromised rents, on the flip side "upside sharing" means that their support is rewarded by a higher return if the CVA does what is hoped, and the business is turned around, becoming profitable once more.

Squeezing landlords too much?

There are no restrictions on what a company can propose in a CVA save that its terms must not unfairly prejudice unsecured creditors. This allows a company to propose terms specific to the needs of the business to enable it to survive. However, not all recent CVAs have included a share of the gain as well as the pain.

The Regis CVA is an example of a CVA where landlords felt more pain than gain. Some of the landlords of the chain's hair salons saw their rent reduced by 100%, receiving a nil return under the CVA. It is perhaps not surprising that the Regis CVA is currently being challenged.

Similarly the House of Fraser CVA, which sought to apply an arbitrary 75% rent reduction on those stores remaining open, was also challenged by landlords on the basis of unfair prejudice. The legal challenge was settled on confidential terms outside court for a reported £1 million.

Preserving a landlord's claim on failure

In addition to "upside sharing" we expect to see CVAs (and landlords requiring a CVA) to include a provision entitling the landlord to claim the full amount of rent due if the CVA fails.

The BHS CVA proposal included such a provision, enabling landlords to claim for the full (not just the compromised) rent when the CVA terminated and BHS went into liquidation.

Landlords being asked to support a CVA should consider whether a similar provision exists. If not, and the CVA fails, a landlord may only be able to claim for the compromised rent.

What other trends do we expect to see?

Business rates

Business rates apply annually and are payable to the local council in which the property is located.

Homebase was the first to compromise rates as part of its proposal and more recently the Paperchase CVA also applied a discount to rates.

A CVA can only compromise rates until the end of the current business rates year. After that, they return to their previous level but if a struggling retailer is considering a CVA after 31 March, the ability to compromise business rates could be invaluable.

Foreign leases

While the UK remains part of the EU, businesses, which operate in the EU, may be able to take advantage of the fact that UK insolvency procedures are automatically recognised in other EU member states. This enabled the terms of foreign leases to be compromised as part of the Homebase CVA.

This may not be an option for much longer, but for the bigger retailers having the ability to compromise the rents of foreign leases may also be a valuable tool when looking to restructure through a CVA.

Changes to landlord behaviour outside of insolvency

Landlords are also feeling the impact of CVAs outside of any direct formal insolvencies or financial distress of their tenants.

Next announced last year that it would incorporate a “CVA clause” into its own leases to benefit from a rent reduction if its neighbouring retailer received a reduction in rent through entering a CVA.

It has also been reported that Next have sought significant rent reductions on lease renewals.

Conclusion

One of the main issues that retailers face is that they are tied into long and expensive leases. Competition from online retailers has meant that these rents are becoming more and more difficult to sustain and CVAs are becoming a popular way for companies to restructure and avoid insolvency.

Landlords often hold a large percentage of the voting power and gaining their support is key to obtaining approval of a CVA.

Many landlords have been hesitant to agree to terms in a CVA that compromise their position but recent proposals seem to strike the right balance between reducing costs; giving a distressed business the headroom it needs to turn the business around but offering a share in the gain for landlords (turnover rents, compromised creditor funds and shares in the future business) in return for their support.

Whilst landlords will inevitably be out of pocket, the alternative to a CVA is often liquidation, which will likely see a landlord recover pence in the pound in respect of unpaid rent, an empty property (and liability for business rates) and uncertainty over future rental income.

It is clear that retail CVAs are becoming increasingly more sophisticated and allow a company to restructure its business to reflect the strength of business locally as well as nationally. Landlords are also much more savvy when it comes to CVAs and it is likely that we will see landlords requiring upside sharing as part of future CVA proposals. The question is: will other major unsecured creditors jump on board and require similar terms in return for their continued support?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Reed Smith (Worldwide)
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Reed Smith (Worldwide)
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions