The fightback by landlords against company voluntary arrangement (CVAs) which allow retailers to shut stores and cut rents, has begun.
Regis, the owners of hairdressing chain Supercuts wanted to use the process to cut the rents on about half its salons through a CVA last year, only for the insolvency procedure to be challenged by landlords, including British Land and Hammerson, who suspect the business had been stripped of its assets by Regis Corporation, its US parent. “On that one, they were just taking the piss,” one landlord said of the CVA.
raises the prospect that the recent flood could slow to a trickle. But while the process disproportionately damages landlords compared to other creditors, halting it may prove a pyrrhic victory.
“While a CVA is not a great outcome for landlords, it has to be better than the alternative, which is an administration, where the impact on creditors is much more severe,” said Will Wright, a partner in KPMG’s restructuring practice. “Now, CVAs are being challenged almost routinely, which makes them harder to implement and may result in more administrations.”
Most retailers continue to live hand-to-mouth, trying to re-engineer their businesses to cater for Britain’s growing appetite for online shopping. They will not be helped by the general election, which is likely to disrupt spending in the crucial Christmas period.
If administrations become the favoured escape route, businesses will fail harder and faster, leaving suppliers and other creditors out of pocket, too. When the Icelandic bank Kaupthing put troubled fashion chain Karen Millen up for sale this summer, the highest offer came from online retailer Boohoo. It bought the brand and its online operations in a pre-pack administration, allowing Boohoo to jettison liabilities. The 32 shops shut eight weeks later.
Billionaire Mike Ashley has kept open most of House of Fraser’s 59 department stores since buying the chain in a pre-pack administration last year, but in many cases he signed only a short-term lease paying business rates, with zero rent. Landlords are free to take the leases back, but the surfeit of empty floorspace on the high street means this is often the last thing they want.
CVAs first arrived in the sector a decade ago, when the restructuring expert Richard Fleming used one to close 140 JJB Sports shops. Their use spread in the wake of the financial crisis and CVAs have hit new highs over the past two years, as chains have been hammered by higher sourcing costs, wage bills and business rates.
JJB staggered on before doing another CVA two years later, then collapsing in 2012. Only half of the 32 retailers that have undergone a CVA are still trading, according to property agency Colliers.
The failure rate is one of many objections landlords raise against a process that they feel puts a metaphorical gun to their heads. They are, in effect, asked to vote through CVAs and take the pain or vote them down and jeopardise thousands of jobs.
Sir Philip Green remains at the helm of Arcadia Group, having got his CVAs over the line in June only by agreeing to rent cuts of between 25% and 50%, rather than his initial request for 30% to 70%, after pushback from landlords.
Debenhams’ CVA was approved by a far bigger margin in May, but was challenged by property investor Aubrey Weis, who owns some of the chain’s stores. His legal action was financed by Ashley, who lost £150m when his 30% stake in Debenhams was wiped out in a debt-for-equity swap.
While the challenge failed on multiple counts, it is expected to set a legal precedent, giving landlords the right to boot out retailers from shops if they pursue CVAs, further reducing the procedure’s attractiveness for struggling chains.
After years of dismal trading, some retailers are in such poor shape that a CVA may not even make a meaningful difference to their chances of survival.
“CVAs are unwinding because the market has moved on. Trading is so poor now that a lot of retailers will need to get rid of 60% of their shops and cut their rent [on the others] by 75%,” one restructuring source said. “There will be fewer CVAs, more administrations and a greater impact on landlords.”
Despite the collapse of Regis UK, the landlords’ legal case, which is also targeting Grant Thornton, architect of the CVA, may still go ahead. A source close to the situation said that costs associated with the case had pushed Regis over the edge — an accusation rejected by property owners.
Landlords want the case to set a legal precedent on other egregious aspects of CVAs. Even if they achieve meaningful reform, however, it would not ease the gloom on the high street. They would be winning the battle, but still losing the war.