Daniel Stern of Slater Heelis writes:
The retail sector is in a state of flux.
Debenhams has issued a profits warning and House of Fraser recently entered into a high profile Company Voluntary Arrangement (CVA).
Following my recent guide to tenants’ CVAs, here I look at what landlords can do to become more flexible to survive retailer insolvencies.
With the number of CVAs on the rise and many retailers being affected, landlords are now feeling the repercussions of the economic change and the backlash of CVAs.
With customers now more inclined to shop online in the comfort of their own home and business rates increasing, more retailers are finding themselves in a less desirable financial position leading them to insolvency and CVAs.
A CVA is a procedure that allows a company to address its financial difficulties and settle debts by coming to an arrangement or compromise with its unsecured creditors.
Furthermore, a CVA provides a mechanism whereby the tenant company can restructure its lease and rent obligations without the need to negotiate with their landlords.
CVAs are leaving landlords at the bottom of the food chain when it comes to recovering debts and rent. Once administrators are involved, a landlord’s rights are suspended indefinitely.
If the suggestion of a CVA is mentioned to a landlord by its retailer tenant, the landlord should act quickly before decisions are made on their behalf without any input from them.
There are a number of options available to a landlord, all of which will be painful but should give it the best chance of salvaging something from what will be a difficult situation:
1. Rent reduction
Landlords might decide to reassess their flexibility when it comes to reducing rent. Reducing their rents and avoiding large annual increases would benefit the retailers and, in turn, their landlords. Clothing store Next is currently trying to change its leases and have a ‘CVA clause’ added in, whereby it will be able to renegotiate its rent and agree rent reductions on stores where a neighbour receives a similar deal through a CVA.
Landlords may be able to save themselves a complete loss of rent from their tenants. Reducing rent may allow retailers to keep their stores open, giving landlords their much wanted rental income. If landlords do not consider this, they could be left in a worse of position with an empty store with no rent at all being paid and a rates liability.
A well advised landlord may even be able to negotiate a stepped fixed increase rent provision, with triggers being the performance of the tenant’s store or overall business.(similar to option 2 below)
2. Turnover leases
This could be another solution to retailer insolvency and landlords being paid their rent. A turnover lease is a where the rent payable to the landlord is calculated based on the tenant’s turnover, including all profit made by the retailers both in and out of the premises (e.g online sales). Tenants would be more likely to continue with their leases as the risk is shared with both the tenant and landlord equally, as are the benefits. If the tenant has a good financial year, the landlord will receive a better rent.
3. Monthly terms
Agreeing by way of a side letter that that the tenant can pay the rent on a monthly rather than quarterly basis is another option. Renegotiating the lease in general could benefit both the tenant and landlord as it can make matters more manageable for both parties. Changing the lease gives the landlord a chance to protect its rental income by keeping the tenant in place on a term and rent more manageable for them.
It is important that both the landlord and tenant discuss matters as soon as possible to avoid a situation where a tenant becomes financially distressed and has no choice but to take advice from insolvency experts.
If you are a landlord looking for advice on a lease agreement contact me on 0161 672 1543 or email email@example.com
This article was originally published on Place Resources.