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Landlords strike back – Are Creditors Voluntary Arrangements (CVAs) the new pre-packs?

7th June 2018

As House of Frasers announce that it’s restructuring plan, which includes a CVA, involves the closure of 31 of its 59 shops, the British Property Federation (BPF), the trade body for residential and commercial Landlords, have raised their concerns, this morning, that Landlords are being unfairly treated.

CVAs (Creditors Voluntary Arrangements) have come to the fore this year, with New Look, Mothercare, Carpetright and other notable High Street retail and restaurant names, using this restructuring process to streamline and adapt its struggling businesses, often closing stores and reducing rents, in an attempt to rescue the underlying business.

The BBC news website reports today that the BPF chief executive Melanie Leech said landlords wanted to help genuinely struggling businesses, but some of its members believed that CVAs were being misused.

“Landlords get a raw deal in any CVA – they are going to be one of the biggest creditors,” she said.

“They are always going to be hard hit. The issue is whether they are fairly taking a share of the pain.”

It is true, of course, that proposals to vary rents downwards or close stores will obviously impact Landlords, many of whom are investment funds, but they also impact employees, suppliers, equity investors, lenders and the High Street as a whole. The rationale behind the CVA proposal is to rescue the business preserving the remaining jobs and the income streams of remaining landlords. It is often the case that the single largest outlay for any retail business is the costs of its bricks and mortar presence.

It shouldn’t be forgotten that the failure of a CVA proposal, will most likely result in the closure of the whole retail business and the loss of all jobs and store presence, such as with Toys R Us.

Retail businesses are feeling the pinch right now for a whole host of reasons, but CVAs offer an alternative to the failure of the whole business. Often Landlords can have more than one store affected, so whilst one might become empty under the CVA, others survive and remain providing a source of rental income.

Often, CVA proposals amend the terms of the lease, so that Landlords who can source a tenant willing to pay higher rents can remove the existing tenant more easily.

The points raised by the BPF this morning, seem very familiar to the points raised against pre-packs, so hated by landlords 10 years ago, and you could argue that the increase in use of CVAs by retail businesses, is an attempt to give the transparency and openness the BPF are looking for. CVAs themselves are very transparent; at least to those involved, the proposals are written and circulated, and supervised by an insolvency practitioner, and can, in the most cases, offer the best solution for both businesses and Landlords, where the option is the closure of the whole business. At the point that a business presents a CVA proposal, the time for querying its previous strategy of growth and borrowings has largely passed, as it has reached the end of the road.

The rise of CVAs and the divergent interests the proposals cause, do at least illustrate that when faced with a CVA proposal, Landlords are more aware of the necessity of taking good commercial and legal advice – and – done right, a CVA can, with the support of creditors, can provide a solution to rescue and business, not just retail, rather than consign it insolvency and closure.

I hope that the issues raised by the BPF today, might encourage landlords and their trade bodies to be more involved in examining the underlying business of tenants before they agree lease terms, as many of the businesses seeking the protection of a CVA at the moment have been over leveraged for years.

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