In this so-called retail apocalypse, high street stores are dropping like flies. Low consumer confidence and falling turnout have driven to plummeting profits and many retailers struggling to pay rent and other operating costs. In a desperate bid to stay afloat many retailers have turned to Company Voluntary Arrangements (CVA) to prevent insolvency and boost their lifespan.
A CVA gives retailers some breathing space, where property owners accept lower rent to allow tenants to get back on their feet. Retailers such as House of Fraser and Mothercare and restaurant chain Carluccio’s have followed through with CVAs to save their business.
These voluntary agreements may prevent retailers from financial collapse but property owners resent the rent cuts and the risk they pose to their own financial status. Now that clothing chain House of Fraser is seeking approval for a CVA of their own, around a dozen landlords have declared staunch opposition. They are willing to concede in exchange for a list of demands, ranging from detailed financial forecasts to a significant equity stake in the company. If more than a quarter of landlords oppose the company’s terms, the CVA can be blocked and they can proceed to their demands.
While a CVA provides retailers with the opportunity to restructure their finances, it does little to help improve them. Retailers should look for more than breathing space and instead look to improve their finances for the long term.
At the Credit Protection Association, many of our members have suffered from falling profits and have expressed an inclination to pursue insolvency proceedings. However, our debt recovery and credit management products have not only removed the risk of closure but have recovered residual debt and put our members back on the high street in better shape than before.
Restructuring experts from consultancies Begbies Traynor and JLL are advising the property companies, who can block the CVA and demand improved terms if more than a quarter of landlords rebel against the company’s proposed terms.
Begbies Traynor partner Mark Fry said: “Landlords represent pension funds, investment funds – they’re spending the ordinary man in the street’s money. So when rents aren’t paid, that affects the performance of these funds. It’s not just about rich property owners.”
Some retailers have also become frustrated with the CVA system after watching rivals with weaker finances secure lower rents than them. Fashion chain Next is to insert a “CVA clause” into its lease agreements under which its own rents must also be reduced if any of its landlords’ other tenants agree a CVA.
Simms said rent reductions should be accompanied by other measures to repair a company’s finances, such as debt restructuring and cost cuts, adding that the government would come under pressure to reform the system via legislation.
“Some landlords are grouping together to start to say this is not right and not equitable,” he said. “Resistance and pressure will really be ramping up over the next few weeks.”
Revo, which represents retail property companies, has written to the Commons housing, communities and local government select committee warning of a trend for CVAs.