UK retail landlords are calling for changes to the company voluntary arrangement process, as more retailers announce plans to enter the controversial rescue procedure.
House of Fraser’s decision to launch a CVA in June was lambasted by Ian Fletcher, director of real estate policy at the British Property Federation. He says the retailer’s failure to consult landlords on its decision was a “highly insensitive” move.
Landlords’ tolerance for dealing with CVAs is waning.
Fletcher says: “I sense that landlords are supportive of genuine businesses in trouble. But some are starting to feel that some of the businesses coming forward could be relatively solvent with increased investment from the owners of those businesses.
He adds: “Landlords therefore feel it is unfair, because the restructuring falls on their shoulders.”
Stephen Springham, head of retail research at Knight Frank, says that landlords have in the past “grudgingly” voted in favour of CVAs, but now their dissatisfaction with the process is growing into something more structured.
Springham says: “Until landlords band together and say they won’t vote in favour of a specific CVA, I don’t think things are going to change.
“So far we haven’t seen much groundswell against CVAs apart from mutterings from disgruntled landlords, but behind the scenes there seems to a bit more of a structure forming to argue that it’s not an equitable situation.”
Under the way CVAs are structured, landlords are often asked to accept losses through store closures or rent reductions, while other types of creditors are sheltered from losses.
Here EG looks at six ways the rules around CVAs could be altered to level the playing field.
1. Dividing the vote
The way the vote is cast to approve a CVA is one of the principal areas for reform, says the BPF’s Fletcher. Currently CVAs must be approved by 75% or more, by value, of the business’s creditors.
Fletcher says: “There is a lot of latitude about how those votes are put together at the moment, not only in terms of who is able to vote but also the individual voting rights the landlords get.”
One idea would be to slim the vote down to 75% of affected creditors instead, rather than including those that will not feel any impact.
Another possibility is to spread out the burden by including secured creditors. However, David Fox, co-head of retail agency at Colliers International, thinks this could cause more problems than it would solve. “If you widen the net so that the banks suffer more, the recent spate of CVAs we’ve seen go through might not have been quite as successful,” he says. “The banks go through a period of renegotiation on their finance deals – in effect, going through a CVA allows a company to renegotiate with the banks. So the banks are exposed as it is.”
2. Scrutinising the administrators
Under the current CVA structure, which is designed to help companies pay back their debts over a longer period, repayment schemes are overseen by an insolvency practitioner.
However, this practice calls into question the integrity of the insolvency practitioner involved. More transparency regarding their procedures is another change that landlords are pushing for.
Fletcher says: “A key aspect of policy to examine is the insolvency practitioners that declare the business would become insolvent without a CVA process. This could often lead to doubts about the integrity of the large insolvency practitioner.”
3. Lengthening break clauses
Allan Lockhart, chief executive of NewRiver REIT, notes that in general real estate owners find themselves caught on the back foot with short break clauses as set out in a CVA.
He says this is another area that could be reviewed to lighten the burden on the landlords. “Landlords should have a longer period to exercise their break clauses,” he says.
“It always takes time to find a new retailer and negotiate a new lease. To make it fairer, CVAs should include a longer period during which landlords can take back control of their units.”
“I think CVAs are unfair from a landlord’s perspective. The terms of CVAs are inconsistent. Anger and frustration is growing about the unfairness.”
4. Reforming the consultation process
A consultation process ahead of a proposed CVA would also give landlords more time. Simon Russian, head of retail at Legal & General, notes that current notice periods are generally “pretty tight”.
“Understandably the retailer has certain horizons and need processes to be brought through quickly, but working to make timescales less demanding than they currently are by having a consultation process with key landlords in advance of the CVA process starting would be a good idea,” he says.
5. Communicating more, and earlier
On the whole, landlords agree that much more progress could be made in terms of early communication between landlords and insolvency practitioners. The process could therefore benefit from more formal guidelines.
Russian says: “A number of landlords are working with the BPF on best practice and how much transparency there is in the process.
“We would welcome more consultation up front on what the implications are, which is something we have been seeing more of.
“What we want to know is whether the retailer has a sustainable long-term business plan going forward, and how we can partake in that success if we have taken a financially punitive hit.
“Transparency has improved but I think allowing the dialogue to continue even after a CVA is approved is really important for all landlords.”
6. Recalculating performance-based rent
Several real estate owners noted that the way rent reduction proposals are calculated at present is often based on whether market rents for the units are less than payments made under the terms of their leases – which has struck them as unfair.
Some landlords have suggested more weight should be put on the perceived affordability of rents for the occupier, based on their profitability and projected turnover, rather than market rents.
“Retailers have looked at rent cuts under the CVA based on their opinion of the rental value of that shop, which is driven by the affordability of that rent to that business, and they may be two separate things,” says Russian.
The verdict
The rate of companies opting for a CVA, from Carpetright to New Look and Select, does not appear to be slowing. Landlords’ patience is beginning to fray, but their burden could be lightened by changes, either formal or informal, in several areas.
As momentum grows, it will be down to the trade bodies to make landlords’ voices heard and to push these reforms through.
