Debenhams success in achieving its CVA last Thursday comes with a double- edged sword.
This is because according to John Webber, Head of Business Rates at Colliers International and sets an uneasy precedent for the finances of local authorities which have similar struggling retailers in their boroughs.
The terms of Debenhams CVA, backed overwhelmingly by its creditors on Thursday, will mean Debenhams will eventually close a third of its 166 UK stores to allow the chain to continue to trade. The firm last month announced that the names of 22 stores it would be closing.
However, Colliers understands that in its CVA proposals, Debenhams had categorised its properties into 5 groupings and now plans to reduce its rates bill in two of these categories (Category 4 and 5) by around 50% in the current billing year, backdated to 9th May 2019. Such properties have been referred to as “materially underperforming” (Category 4) and in “smaller, weaker tertiary retail centres” (Category 5).
Colliers estimate that this measure alone will impact on 59 local authorities who will lose out on £8.5m of the £17.3m rates bills Debenhams should have been paying on the properties in these categories, this billing year.
Particularly hard hit will be the local authority in Newcastle Upon Tyne for example who will lose over £543,000 this year of the £1.169m it was expecting to receive, Guildford who will lose £446,070 from the £811,440 it was expecting and Hammersmith and Fulham (Westfield) who will lose over £715,000 of the £1.54m it should have received in the same period. Big sums to lose from one store in one year alone.
“Debenhams claims its new arrangements will offer a better return for the Rating Authority than going into administration, where after a short trading period the premises would be closed and no business rates would be paid under the exemption for empty properties. And to some extent they are right- stores are kept open, jobs are saved and at least some business rates are paid to fund public services.
“But, leaving aside the irony that it is the iniquitous business rates system that has been one of the major reasons for this mess in the first place, this move by Debenhams has far reaching implications.
“In the long run, if by using a CVA a retailer is let off the hook of some of its business rates liabilities and this practice is followed by other struggling retailers, we will see the public purse massively compromised. Local Authorities will not have the funds they have budgeted for to run local services, which we already know are tightly stretched. “
“And on the business side we may see the emergence of a two-tier high street with those stores who have been run efficiently and have embraced the changing retail market place paying much higher rents and rates, than those like Debenhams who have not followed such a prudent path.
“The well run will be subsidising the poorly run.”
He added, “Looking at Westfield, for example, one might question the ethics of the rate payers of Hammersmith and Fulham subsidising the Debenham’s store in such a prestigious location.
“It has been well documented that these CVAs have led to grumbling creditor landlords, not happy that that their rents are being reduced. But this takes the problem one step further as the man in the street is now adversely affected too
“Not an ideal scenario for UK High Street going forward, it will be interesting to see how long such a scenario can in actual fact last.”