CVAs and “Savvy” Tenants: Points to note for Retail Landlords

The continuing power shift in commercial Landlord-Tenant relationships in the retail sector has been leaving many a frustrated landlord with unenviable decisions to make. Sustained economic uncertainty and the well-documented struggles of the British high street have yielded the rise of increasingly savvy commercial tenants. 2018 was a year of many high-profile CVAs (Company Voluntary Agreement), with businesses scrambling to cut their costs, and landlords often taking the brunt. Several trends have arisen from this, applicable within and outside CVAs. Here are some key points landlords should be aware of.

Rent

There are various methods being utilised by tenants to restructure and/or reduce their rent.

Turnover Rents are becoming an increasingly common - for example, this was used in stationery brand Paperchase’s CVA. The rent payable varies according to the amount of trade being achieved by the tenant’s business. Some common examples include:

• 100% turnover – the rent is calculated purely as a % of the tenant’s turnover (common where landlords are trying to fill vacant properties short term)
• 80/20 turnover – a combination of 80% open market rent plus a % of turnover to plug the 20% gap
• Top-up turnover – the rent is the greater of (usually) 100% open market rent or a fixed % of turnover (common for start-up businesses where the landlord has “taken a chance” on the tenant)

A key point to consider is how “turnover” is defined. Does this include online sales or just restricted to the premises? Does this exclude bad debts and keep turnover just to sums “received”? It should be noted therefore that turnover rents will require closer involvement from landlords keeping tabs on the financial performance of tenants.

Negotiating rent reductions is an obvious tactic, and William Hill’s recent letter to its 2,000 landlords requesting 50% reductions shows just how much power tenants are wielding. Clothing and homewares retailer Next, meanwhile, have negotiated rent cuts of 29% on lease renewals. Next have also gone further and introduced a ‘CVA Clause’ to entitle them to rent reductions if a neighbouring retailer in a retail park or shopping centre is granted rent reduction as part of their own CVA deal.

Meanwhile Leases

Mike Ashley’s restructuring of House of Fraser has included the usual step of using “rates only” or “meanwhile leases”. Key characteristics of these arrangements include:

• Either no rent or a peppercorn rent, with landlords instead having their business rates, taxes and other outgoings paid by the tenant
• Fixed, “contracted out” terms, combined with short notice break clauses
• Restrictions on tenants regarding alterations to the property and transferring their interest to a third party

Meanwhile leases do afford landlords a number of benefits, such as retaining active occupation of premises; especially important if a property cannot be quickly and easily re-let (e.g. department store space). Points to consider for the landlord when negotiating these agreements should be maintaining considerable control and allowing the landlord to continue marketing the property throughout the term. While more commonly found when landlords need temporary occupiers, the state of the market could see meanwhile leases more widely deployed.

‘Profitable’ CVAs?

Details of Arcadia’s restructuring plans have surfaced recently, with landlords to potentially be offered shares as quid pro quo in return for their support of Sir Philip Green’s plans. The most concerning factor is that Arcadia are considering the CVA avenue despite still being profitable. This could set a worrying precedent, but landlords for now should be alert to tenant approaches for concessions at any time, CVA or not.

For more information contact Simon Bailey from the Real Estate team.