Retailers looking to slash their property costs - negotiations triggered by September 29 rent day
The number of retailers using company voluntary arrangements (CVA), a form of insolvency procedure, to renegotiate their debts with landlords has jumped by almost a quarter in a year says Wedlake Bell, the City law firm.
Wedlake Bell says that 54 retail businesses have undergone CVAs in the last 12 months (year to end June 2011) up from 44 in the previous year. Wedlake Bell explains that this is in spite of a decline in overall corporate insolvencies in this period.
Wedlake Bell predicts that the September 29 quarterly rental deadline could prompt a new wave of retail sector CVAs as retailers seek to cut their property costs in an attempt to save their business.
Landlords often contest CVAs because they can be hit harder than other creditors as a result of the restructuring of the retailer's rental obligations. Landlords are concerned that CVAs are being used by retailers to pay less of the arrears as well as reduce rent going forward.
Edward Starling, Partner, Business Recoveries at Wedlake Bell said: "Retailers are faced with a toxic brew of woes caused by the credit crunch, sluggish summer trading and the next quarter's advance rental payment. Troubled retailers, along with some creditors, see a CVA as a good way to slash the business's historic debts and control costs going forward in order to save the business."
"Because property costs are such a large overhead, the suspicion amongst some landlords is that the CVA is being engineered primarily to target the lease obligations. That means that the company's landlords or one particular landlord might lose out disproportionately. There can be a lot of hard negotiating if the landlords are to avoid carrying the can."
In the last year, CVAs have been undertaken by Blacks Leisure, JJB Sports and Suits You.
Adds Edward Starling: "Unlike some trade creditors, landlords can be asked to make large concessions to leases that should have provided them with an agreed revenue stream for a significant period."
"However, the fact that more CVAs are being agreed suggests that recent experiences and very uncertain economic circumstances mean that landlords see the risk of the company going into administration as simply too big and that CVAs can be the lesser of two evils. In addition the CVAs that are being proposed now tend to be more realistic and less overtly detrimental to the landlord."
Wedlake Bell point out landlords must ensure that they understand the full implications of the CVA's precise terms in order to avoid unexpected losses and to weigh up the impact of the CVA with the alternatives - which may be the whole of the tenant's business failing - which is in no-one's interest.
Edward Starling adds: "It is vital that landlords know what they are signing up to before they agree a CVA as the circumstances under which it can be challenged are narrow."
"However, a well-drafted and reasonable CVA can provide landlords with a level of certainty that is preferable to the risk that the retailer will fail. They also give them the landlord a chance to have some involvement and negotiate terms rather than being faced with a business that has already failed."
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