The nightmare of CVA's

I was interested to read, in The Times business section yesterday, that fashion chain Republic is entering into negotiations with their Landlords. Republic want to review their unprofitable stores and propose a move to monthly rents (see further posts on this subject).

It is likely that 2013 will see a number of retailers announce that they are reviewing their property portfolios. Whilst the recent PMI showed growth in the services sector, the economic outlook still remains uncertain and inflation is hardly on a downward trend. When you factor in business rates, restrictive parking and Internet dominance the fact that stores are reviewing their less profitable Leases is hardly surprising. A Lease may not be generating profit for a variety of reasons:

• The property is in a difficult / less attractive location
• The store may be smaller than other shops in the portfolio
• Footfall at a particular store may have been particularly week
• Some stores may stock products which are less popular

However, there is one issue that still poses a problem for many Landlords- CVA's (it should be noted that Republic have not entered into a CVA). Bodies such as the British Property Federation (BPF) have proposed reform of the CVA regime. The problem is that CVA's are perceived as letting Tenants off the hook by walking away from their Lease obligations. A CVA needs 75% of the votes from its creditors in order to be agreed. Some Landlords (those with less profitable Leases) have more to lose than others but still get the same vote as the other Landlords. Either way, the Landlord is left out of pocket whilst the Tenant is free to walk away.

So what's the answer? a solution to Landlord's CVA concerns could be a solution that was used in the CVA of Travelodge. Once a CVA is agreed, the Landlord could take a share of any future profits made by the business. In other words a 'claw back' clause. That way the Landlord still has an interest in seeing the business (and the Tenant) succeed. The administrators of Travelodge offered the Landlords an extension of their Lease terms. This had not been offered in any CVA before and was designed to offer as much value to the Landlords as possible.

Problems in the retail sector are not set to go away any time soon. Retailers will continue to review their less profitable Leases. A 'Travelodge solution' may be a way of getting round the problem of CVA's whilst still offering value to the Landlords.

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