CVAs, House Of Fraser And The Death Of The High Street

Landlords are beginning – well, vocally at least – to complain about the use of CVAs in reducing rents on commercial properties. Company voluntary arrangements are akin to a bankruptcy, in which all the various contracts entered into by the company originally are up for grabs. OK, not in detail they’re not but in practice that’s pretty much what happens. Companies like House of Fraser are making use of them to get out from under the cost burden which is collapsing the business. The only problem we’ve got here with landlords complaining about this is that landlords are part of the reason people use CVAs.

So, you know, biter bit and all that:

A group advising House of Fraser landlords has hit out at proposals that would see them “take all the pain” while shareholders benefit from £70m pumped into the ailing department store chain.

House of Fraser is proposing to close of 31 of its 59 stores, and as part of a rescue plan is seeking creditors’ permission to slash rent bills at these outlets, as well as at some of those not being axed.

This would be done under a company voluntary arrangement (CVA), a controversial form of insolvency being used by a growing number of struggling high street chains. Typically, property owners are asked to accept lower rents to help a tenant avoid financial collapse – something many landlords say amounts to companies attempting to wriggle out of their rental obligations.

Well, no, it’s not attempting to wriggle out, it is wriggling out. But then that’s what happens when a business goes bust. The risk takers in a business, they get the profits in the good times take the losses in the bad, are the shareholders. When the bad times are bad enough that the business ist kaput then they lose everything. At which point we’ve a few different ways of doing things. We can go for a liquidation – just sell everything for whatever (American Chapter 7). We might try to sell it on to someone else who will reform it. Or we might run it through a CVA (akin, but not the same as, American Chapter 11). Shareholders lose in the first and third and the second often takes place for £1 so there too – BHS anyone?.

Now, sometimes liquidation is the correct thing to do. And sometimes the CVA. It depends on whether there’s a core of a business there to be sorted out or not. But note that the shareholders lose all either way. At which point all the other creditors also start to lose out. Because that’s just the way it all happens.

At which point this:

Retail space equivalent to about 180 football pitches has been handed back to landlords this year, in a stark sign of the challenges facing the high street.

A day after House of Fraser announced that it would be closing more than half of its stores, an analysis by Colliers International shows that 11.6 million sq ft of retail has been “lost” to administrations, company voluntary arrangements and planned store closures this year.

The property consultancy said that this included the two million sq ft of retail space that Marks & Spencer planned to offload by closing 100 stores.

We’re quite obviously going through a structural change in that marketplace out there. Online’s eating bricks and mortar. OK, great, technological change and all that. But that does mean that we’d rather expect the rent on commercial retail space to be falling. And yet there’s a peculiarity of English at least law here. Near all commercial leases have upwards only rent reviews. Thus the change in retail rents comes not – if prices are falling – at rent review time but at the end of a lease.

Hey, if people signed these things then why not? But it does mean that the landlords are slightly forked tongue speaking here. The CVAs are because the businesses cannot afford the high rents they signed on for. The rents on newly let space are falling. But all extant leaseholders are being held to those old higher rents. And the only way out is through the CVA. Thus CVAs are rising.

Which brings us back to that wriggle out part. This isn’t an attempt to do so, it’s the only form available of doing so in a falling rent environment. Thus they’re becoming more common.