Perspectives 2019

T he Company Voluntary Agreement (CVA) in its current form was first available to be used from 1 January 2003 courtesy of the Insolvency Act 2000. During the period of the CVA, the directors of a company at threat of insolvency are in control, rather than an Administrator or Liquidator. The CVA process offers directors the chance to retain control of their companies while reducing costs, stabilising the business and (hopefully) returning to profitability. It is in recent years, however, that it has become particularly contentious in the property world, as an increasing number of high-profile tenants use the process to their advantage. 2018 was dubbed the “Year of the CVA” due to the sheer number of retailers and restauranteurs seeking to restructure their estates in the hope of avoiding insolvency and the inevitable administration or even liquidation. During that year House of Fraser, Mothercare, Homebase and New Look were just a few of the notable retailers using a CVA. In the restaurant sector, Jamie’s Italian, Prezzo, Byron and Carluccio’s were some of the well- known names hitting the headlines for the same reason. At the time of writing Monsoon, Debenhams and Arcadia are the latest big name retailers to have secured a CVA, and these have been in the face of strong legal challenges How do CVAs affect landlords? Fixed property costs, especially rent, form a large proportion of a company’s liabilities – and are often easier to target than wage costs or the cost of buying in goods. The CVA process can also offer the tenant the opportunity to renegotiate other lease terms such as introducing break options and watering down dilapidation liabilities. In the current challenging retail and restaurant markets, landlords know it can be even more difficult to find a new tenant if faced with a vacancy resulting from a tenant’s financial difficulties. Many landlords therefore feel they may have little option but to agree to a CVA, despite the probable rent reductions and possible lease variations. The hope is that the tenant can re-emerge stronger and, in due course, get back to paying market rent levels following a period of soft rent. Bigger isn’t always better The covenant strength of a tenant has long been a key factor in the valuation and pricing of investment property. An investor will typically seek the national tenant over the equivalent property that is let to an independent i.e. the sole trader, partnership or established (but comparatively small) private company. The longevity and apparent popularity of a multiple outlet national business, or a good credit rating, instils confidence that the property is a good buy and provides robust, secure income – which may persuade the investor to pay more and accept a much lower return than the equivalent property let to an independent. The seeming ease with which a tenant can use a CVA to alter material lease terms might, however, suggest that the extent of the valuation premium is not justified. There have also been accusations that some high-profile tenants have used a CVA to walk away from outlets that are under-performing but not necessarily loss making. Independents with one or a few outlets are more likely to be in more control, and to have carefully considered each outlet before committing. Is smaller safer? The directors of larger companies have limited liability and such events are unlikely to impact on their personal financial circumstances. Contrast this with the private individual in a similar situation running an independent business – walking away from lease obligations means being faced with an Individual Voluntary Arrangement (IVA)/Trust Deed, or Partnership Insolvency. Apart from putting at risk personal assets (e.g. the family home) there is also the potential impact on future career and business opportunities. They therefore have a much greater incentive to do all they can to turn the business around to avoid any insolvency or voluntary arrangements. Further, many of the national operators, especially in the restaurant sector, expanded quickly, taking on multiple properties in a short space of time to secure representation in the major towns and cities. Subsequently many realised they had secured poor locations in saturated markets. By contrast, independents with a small number of outlets are more likely to have carefully considered each new location before committing. Few businesses are immune to market downturns, but with an independent tenant a landlord is more likely to have a direct line of communication with those taking key decisions in the business. Dialogue with the people who have the most to lose should the business come across tough times is preferable to being a small part of a large group of creditors dealing with highly specialised restructuring consultants hired by a national tenant. Valuers will focus on risk. Should this focus now be a little less on covenant strength, and more on the re-letting prospects if faced with vacancies and the sustainability of the rental tone? CUSHMAN & WAKEFIELD 21 #TRENDING