CVAs – Landlords strike back?
2018 has been the year of the CVA (Company Voluntary Arrangement) in the retail and casual dining sectors. With difficult market conditions and falling consumer demand, a number of high street chains have struggled to continue to meet their liabilities.
Recent high profile cases include retailers New Look, Carpetright and Mothercare and casual dining chains Jamie’s Italian and Prezzo who have used CVAs to reduce rental bills and close loss making stores.
The purpose of CVAs was to provide a mechanism for struggling businesses to stave off insolvency and protect jobs by renegotiating their liabilities with creditors. Whilst clearly an admirable aim, there is a feeling that CVAs are being abused. Landlords in particular who have had to bear the brunt of this are angry and see the growing use of CVAs as a means to reduce or escape rental liabilities willingly entered into with a view to restructuring businesses at landlords' cost. Trade bodies such as The British Property Federation and Revo are now calling for a review and reform of CVAs to address these concerns. Landlords' general dissatisfaction with CVAs may well be turning into a more structured opposition with landlords banding together to use their voting power to challenge what they see as an unfair process.
The reaction to House of Fraser's proposed CVA shows the extent to which landlords are now pushing back against what they see as the unfair use of CVAs. House of Fraser's proposed CVA includes significant rent reductions and closure of a large number of its stores. Landlords are however angry over House of Fraser’s failure to discuss the move before announcing it and the fact that it coincided with news of a fresh cash injection from its Chinese owners. The Sunday Times reported that a number of affected landlords have appointed Begbies Traynor and Jones Lang Lasalle to represent them and are looking for a better deal, including the possibility of a share in its future profits. This unified approach is a sign of the growing backlash against CVAs and something that we are likely to see more of in future CVAs.
It is not just landlords that feel hard done by. Next is unhappy that CVAs are, it says, being used to give its competitors an unfair advantage on the high street. Next's solution to level the playing field is a clause in its new leases requiring landlords to give Next a similar rent reduction to any neighbouring store that gets a reduction through a CVA. Any such move will almost certainly be strongly resisted by landlords already dissatisfied by CVAs. Next's approach also does not particularly sit well with the original purpose of CVAs which is there to keep a struggling business afloat rather than a way for a healthy business to secure rental reductions.
The current difficult market conditions make it likely that CVAs are only going to increase in the coming months. However the feeling that some are using CVAs cynically is growing. With landlords now looking to work together to challenge what they see as an abuse of the CVA process, we can expect more battles between landlords and tenants in the coming months.