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Property industry hits back at retail CVAs

Lauretta Roberts
28 May 2018

The property industry is hitting back at the growing use of CVAs among ailing retailers as a method to seek rent reductions and store closures.

CVAs or Company Voluntary Arrangements are a legally agreed arrangement between a distressed company and its creditors, which is essentially aimed to give the company breathing space to financially restructure.

If approved by more than 75% of its creditors by value, the CVA allows a company to pay back only a portion of its debts over a period of time while the business gets back on its feet.

However CVAs can often fail if a company's directors tire of ploughing all its profits back into paying off its creditors and place the business into administration to wipe out liabilities, or if the underlying problems which led to the CVA are not addressed, or indeed if banks or public sector creditors such as HMRC (which are not bound by CVAs) decide to withdraw support.

Increasingly retailers, in a trend kicked off in the fashion sector by New Look earlier this year, are using the process to demand rent reductions from property companies and to request permission to close loss-making stores before leases expire at the expense of the landlord.

New Look

Since the New Look deal, fast fashion retailer Select has had a CVA approved to allow it to reduce rents on some of its stores and both Mothercare and House of Fraser are in the process of trying to get CVAs approved, in part for the purpose of reducing their store counts.

House of Fraser's request is being met with resistance, however, with the Sunday Times reporting that a group of about 12 landlords, including Legal & General and Westfield, had hired Begbies Traynor, a restructuring firm, and JLL, a property consultancy, to work directly with House of Fraser to try to secure better terms that those it is proposing for its CVA.

It is believed that House of Fraser is also looking into the possibility of subletting space in some of its 59 stores. Department stores are challenging since, given their size, not many other tenants will want to take the entire unit which they occupy. It is believed the department store is in talks with Japanese lifestyle brand Muji to sublet the basement space of its Oxford Street store.

In addition Revo, the retail property organisation, has written to Clive Betts, chairman of the Commons’ housing, communities and local government committee, requesting an inquiry into CVAs and what it sees as an abuse of the process.

Mark Williams, director of The Hark Group and president of Revo, said in a statement on its website that the government needed to take urgent action to look into the issue of rates and property tax, particularly as online retailers are exempt from the latter creating an uneven playing field.

"There are many underlying reasons for the recent spate of store closures that have been announced and the retail sector is a complex one, but what is entirely clear is that the cost of doing business on the high street is a massive burden that has to be addressed.

"The main cost is now property tax, ahead of rent for many occupiers. Worse, internet retailers do not contribute to the tax, but they’re reaping the benefits. The government has to step up to the plate here and take urgent action on rates, review how it treats online retailers and an examination of the fairness and use of CVAs," Williams said.

And it is not just property companies who are speaking out. Other, financially stable, retailers view the process as unfair. Last week Next was reported to be considering the introduction of a "CVA clause" in future lease negotiations which states that if another tenant in a shopping mall or street in which it operates is given favourable rents, due to it operating a CVA, then those same favourable rents must also be offered to Next.

R3, the Association of Business Recovery Professionals, told The Times that the process of CVAs needs to be reviewed citing research by the universities of Wolverhampton and Aston, which indicated that there should be a time cap on the length of CVAs (three years instead of five) and that companies should be given more time to draw up their plans. In addition it recommends there should be clearer roles for directors and CVA supervisors, as well as more engagement from public sector creditors.

However, Adrian Hyde, an R3 spokesman, said despite their flaws, CVAs are often better than the alternative for creditors: “CVAs can be criticised, particularly given that not all of them meet their objectives and creditors can feel like they have been left out of pocket. Ultimately, however, we’re talking about insolvent companies and without procedures like CVAs, the outcomes for creditors would be worse.”

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