JJB proposed CVA: Will it succeed?

A colleague has just sent to me a copy of the announcement by JJB regarding its proposed CVAs.  Only a month ago I wrote a blog regarding the possibility of HMV proposing a CVA which contained some advice for Landlords.  Thus far it has not happened and, I have been told that my expectations may have been too high since HMV remains profitable despite its troublesome retail sites.
However, from the sidelines JJB is now proposing a CVA the mainstay of which appears to be an attempt to get rid of underperforming sites.  The announcement states the following:

"The key objectives of the CVA proposal will be to:

• enable the closure over the next 12 months of up to 45 stores which are underperforming (the "Category 1 Stores");
• enable a review to be carried out in relation to the remaining stores, with an option to close over the next 24 months up to a further 50 stores which are also underperforming (the"Category 2 Stores");
• enable the Company to continue to pay rates on closed stores in the period up to the first break date under each lease;
• vary the terms of the leases of the Category 1 Stores and Category 2 Stores such that rent will be payable on a monthly, rather than a quarterly, basis;
• reduce the amount of rent payable in respect of stores which will be closed in due course for a period of up to 12 months for the Category 1 Stores and a period of up to 24 months for the Category 2 Stores (if the stores are closed after the end of the relevant period, no further rent will be payable);
• enable landlords of the stores for closure to require the Company to vacate and determine or assign the lease of the relevant property upon at least 30 days notice; and
• vary the terms of the continuing leases such that rent will be payable on a monthly, rather than a quarterly, basis for a period of 24 months."

In November 2009, following the first successful CVA by JJB I blogged on "Tenant CVAs - what makes them successful?".  In this blog I identified a number of common themes which ran through the successful CVAs.  Let's look at those in the context of the JJB announcement:

1. No additional store closures over and above those that had already closed (i.e. landlords knew if their site was closed) - the new JJB proposal leaves 95 stores at threat of closure.  The landlords of those stores may or may not be identified at the outset creating significant uncertainty.  New JJB Proposal fails the test
2. No rent reductions on stores remaining open although movement to monthly rent payments - the new proposal is that rents will be reduced on Category 1 and Category 2 Stores and that on these stores rent will be payable monthly.  On the remaining 150 stores the rent will remain the same.  Double whammy for landlords of Cat 1 and Cat 2 stores.  New JJB Proposal largely fails the test
3. On closed stores the tenant would continue to pay the rates (landlords were protected from this oppressive liability) - this appears to be the proposal on the JJB CVA.  Test passed
4. A pot of money (normally equal to 6 months' rent) was distributed between the landlords of closed stores as compensation - there is nothing in the announcement suggesting such a pot and the implication is there will be none.  Test failed

Therefore, based on my previous views as to what makes a Tenant CVA proposal acceptable to Landlords it is doubtful that the JJB proposal passes the test.

So what should you do if you are a Landlord who has a property let to JJB?  Well, all I can do is re-iterate what I said in my blog on the possibility of an HMV CVA:

• first and foremost do not go it alone - unless you are a significant creditor your ability to block or seek changes in the proposals will be fruitless unless others share your views. Therefore find out who the other landlords are and talk to them
• take legal advice - CVAs amount to binding contracts on both the company and the creditors. Some proposals can mean that the CVA is liable to challenge for "unfair prejudice" but the law is complex
• take valuation advice - especially if your property is one which JJB seeks to dispose of as you need to understand what this would mean in terms of reletting
• act quickly - waiting until the week before the meeting to read the proposals and ask a lawyer to advise you on what it means for you is a case of too little too late. My advice to all of JJB's landlords is to take action now so that you are well prepared in the event a CVA is proposed
• beware breach of your loan covenants - if you have borrowed against the property then any action you take is likely to require the endorsement of your bank.  Also, agreeing reductions in rent could put you in breach of interest cover tests so you will need to check your loan documentation too

Of course the formal CVA proposal has not yet been published so the final form may differ from the outline proposals.  If you are a Landlord who is affected then please feel free to contact me.