The news (Private equity firm pays Dreams' creditors) that Sun European has paid 75p in the £1 to trade creditors of Dreams, which it acquired from the hands of administrators in March is great news for those creditors. But unfortunately the story for landlords is not so good - no such pay out for them.
The commercial logic is obvious - in order to continue trading Dreams needs its suppliers to continue to supply. Whilst there was no legal basis for those debts owed by old Dreams to be paid by new Dreams the ability of those suppliers simply to stop supplying puts them in a strong negotiating position and in this case they have achieved a result which is not bad. Landlords, on the other hand, don't generally have the ability to stop supplying in a way that can impact the whole of the business. At best a landlord may have a few sites and thus be able to negotiate a position on lesser performing sites by leveraging the better sites. But in most cases the negotiating position is pretty much a one way street.
It is this unlevel playing field that means landlrods consistently feel they are getting a raw deal on administrations. Unfortunately it is the very nature of Real Estate that creates this unlevel playing field. I wish I had an easy solution which could level it out but I have to admit I struggle to see a path at this point. So for now I predict whilst trade creditors may get some sweet dreams most landlords will continue to suffer nightmares!
Showing posts with label administration. Show all posts
Showing posts with label administration. Show all posts
Tuesday, 4 June 2013
Tuesday, 6 November 2012
Comet, explosive headlines and blame
There are a number of stories which caught my eye in respect of Comet going into administration. They appeared in many papers and on-line. I am linking to the Telegraph versions of two of them simply because there is no pay wall and they are easy to find (thanks to The Telegraph for being so helpful). The stories are:
The fact is neither of these are real stories and what the newspapers are doing is using human nature and emotions to create a headline and a story.
Therefore, when Comet went into administration the administrators could not simply ignore their duties as officers of the Court and tell Comet staff to continue to accept gift vouchers. But let's not allow their legal duties get in the way of a good headline. Evil administrators are easy targets especially when the other side is a poor child who is already suffering.
My question is what on earth is a charity doing taking its donations and handing them over to a company in return for nothing better than an IOU? That is the angle the newspapers should be looking at. Is that a legitimate use of charitable donations?
Perhaps this is the cause of so many of our problems that we face today. Perhaps if rather than always looking to find someone to blame we stop and ask ourselves what could I have done differently? How much of the fault of what has happened to me is because of me? What could I do to improve the situation? If everyone did that and changed how they acted as a result then we might find ourselves in a much better place a lot quicker.
In the case of the vouchers the charity could be reconsidering its arrangements (perhaps it is already). Perhaps the mother would consider that she could have acted quicker when she got the voucher and immediately gone to Comet (of course I don't know when she got the voucher). As for the stranger who stepped in - well he has done exactly what I suggested. He didn't look for someone to blame he asked himself what he could do and he did it. All we need is 50m more people with that kind of attitude in the UK and we might just get ourselves out of this mess.
"Landlords hit out at Comet for failing to disclose finances"and
"Comet gift vouchers suspended".Of course the suspension of gift vouchers was turned into something completely more "offensive" by the telling of how Comet staff snubbed a buy suffering from cerebral palsy by refusing to accept a £500 gift voucher given by a charity to his mother to buy an Apple iPad for her son. A stranger has now stepped in to buy the iPad instead.
The fact is neither of these are real stories and what the newspapers are doing is using human nature and emotions to create a headline and a story.
Landlords did not get tricked
Let's look at the landlord story first. The story highlights the amount of rent landlords will lose if they cannot re let sites currently let to Comet. It then goes on to quote how landlords did not give concessions to Comet because management refused to be open book about their business plan and finances. I don't get it. Where is the story? Comet sought concessions; Landlords asked for information; Comet refused; Landlord said "no". If landlords had been fed misinformation and then agreed concessions now that would be a story. If there was evidence that OpCapita had taken on the business with the intention of running it into the ground; now that would be a story.Gift vouchers are just IOUs
Now consider the gift voucher stories. First of all let's consider what a gift voucher is - it is simply an IOU. You are a creditor of the business and an unsecured creditor at that. When a company goes into administration all its unsecured creditors are likely to be wiped out or get very little return. There is no separate arrangement for private individuals.Therefore, when Comet went into administration the administrators could not simply ignore their duties as officers of the Court and tell Comet staff to continue to accept gift vouchers. But let's not allow their legal duties get in the way of a good headline. Evil administrators are easy targets especially when the other side is a poor child who is already suffering.
My question is what on earth is a charity doing taking its donations and handing them over to a company in return for nothing better than an IOU? That is the angle the newspapers should be looking at. Is that a legitimate use of charitable donations?
It's not my fault
I suppose you could ask why do I care? Well the main reason is that there are many similar examples where the media creates a story where there is none. In doing so they ignore so many more important angles which may not be as attractive to the public. And all this stems from or points to one major failing in society today - the need to blame someone else. Everywhere we look, every time we see something not to our liking we have to find someone else to blame. Now we have a list of targets and whenever something happens we look to find a story which allows us to place blame with someone on that list - the bankers, the politicians, the administrators, the private equity people, the media. We also have a white list of people who tend to be untouchable and never to blame (a much shorter list) - the man on the street, the charities.Perhaps this is the cause of so many of our problems that we face today. Perhaps if rather than always looking to find someone to blame we stop and ask ourselves what could I have done differently? How much of the fault of what has happened to me is because of me? What could I do to improve the situation? If everyone did that and changed how they acted as a result then we might find ourselves in a much better place a lot quicker.
In the case of the vouchers the charity could be reconsidering its arrangements (perhaps it is already). Perhaps the mother would consider that she could have acted quicker when she got the voucher and immediately gone to Comet (of course I don't know when she got the voucher). As for the stranger who stepped in - well he has done exactly what I suggested. He didn't look for someone to blame he asked himself what he could do and he did it. All we need is 50m more people with that kind of attitude in the UK and we might just get ourselves out of this mess.
UPDATE
This evening (6 Nov) the administrators announced that Comet would now accept gift cards but not corporate gift cards. I have no idea why this decision has been made (or on what legal basis). It is possible the administrators have secured funding for certain gift cards from the secured creditor which has allowed them to do this. In any event clearly shows the impact of a particular story being run in the press. Question is will the nice man who bought the iPad as for his money back?!?Thursday, 10 May 2012
BPF's "Taking the Profit" - extracting maximum value
The British Property Federation (BPF) is an organisation which represents Landlords. Therefore it is an organisation which is important to me because it is important to my clients. It recently launched its "Taking the Profit" campaign. The target of that campaign is the use of administration particularly in the retail sector as a route to turning a distressed business into a more profitable one with the result that landlords either face shop closures or reduced rental income. I made one prediction in my blog on New Year's Day and this fight was it. Thank you to the BPF.
As frequent readers of my blog will know, I have much to say on the insolvency regimes and have blogged many times on the issues facing landlords arising out of administrations and other insolvency regimes as well as the impact of recent case law. It is good to see the BPF seeking to tackle the issues head on and I cannot argue with the first points the BPF makes that the government has failed to act on tightening up pre-packs and making it easier to complain against Insolvency Practitioners.
However, whilst the BPF is to be praised for raising potential abuse of the insolvency regimes for the benefit of shareholders at the cost of creditors (and particularly landlord creditors) I think that in highlighting certain areas which are, perhaps, most headline grabbing some important areas for review have not received similar attention. Some of the publicity around this campaign suggests that landlords are the unwitting, weak and undefended party in a war which is being waged against them by a united force of IPs and private investors. Quite simply, in my experience, this is not the case. Now it may be that my experience (which I admit is largely at the 'better' end of the retail property market (by better I mean primary and secondary) and involves dealing with the likes of KPMG, PWC, E&Y, BDO, Grant Thornton and others) largely misses out the activities at the tertiary end of the market and perhaps practices at that end are a little more shady. However, my suspicion is that some landlord practices at that end of the market are not quite 'code compliant'. Further by failing to identify the real reasons why the current regime unfairly prejudices landlords over and above other creditors risks losing the war.
The bad arguments
1. It is largely pre-pack administrations where landlords are leant on to agree concessions
This is not the case. A pre-pack is when a deal is agreed and documented (but not signed) before the appointment of administrators. Some of the administrations where landlords have been pressured to give rent concessions have been pre-packs. However, most high profile administrations have not been pre-packs yet rent concessions have been sought by the new buyer. Therefore, the BPF is, in fact and rightly, targeting administrations and not just pre-packs with this campaign.
2. Administrations are effectively being used to transfer funds from pensioners who have invested in property funds and property companies to private investors buying businesses from administrators and then seeking rent concessions or threatening to close down
Using pensioners in any argument seems to be 'de rigueur' at present. I think care needs to be exercised in utilising this argument. Apart from anything else when it comes to unprofitable sites there are arguments that the landlord community carries some of the blame:
No one is being forced to do anything. Landlords may not like the threatening manner in which some agents and/or buyers act; saying that unless the rent is reduced a unit will be closed down. But, at the end of the day, the landlord can call their bluff and refuse to agree the concession. Landlords are not above being threatening either. I had one case where a landlord (not institutional) unlawfully re-entered a property through the use of, what can only be described as, thugs because he did not like the possibility of a CVA. That is far more serious than aggressive posturing in a negotiation.
Landlords are big boys and just as able to use an aggressive negotiating stance. As advised in a recent blog landlords have quite a good negotiating position albeit limited by the commercial realities affecting each individual property. In reality landlords are often paying for the fact that they own a property which is not in a prime location and which can no longer command rents at the level originally agreed. If they could get a better rent then they should refuse the rent concession and get possession. That is called risk and, without wishing to teach grandmothers how to suck eggs, that risk should have been reflected in the yield when the property was acquired.
The other side of the coin
The BPF is absolutely right to put the issue of administrations on the public agenda. I think it is important to recognise that there are issues with the system which impact (possibly unfairly) on landlords which should be at the forefront of the campaign:
As frequent readers of my blog will know, I have much to say on the insolvency regimes and have blogged many times on the issues facing landlords arising out of administrations and other insolvency regimes as well as the impact of recent case law. It is good to see the BPF seeking to tackle the issues head on and I cannot argue with the first points the BPF makes that the government has failed to act on tightening up pre-packs and making it easier to complain against Insolvency Practitioners.
However, whilst the BPF is to be praised for raising potential abuse of the insolvency regimes for the benefit of shareholders at the cost of creditors (and particularly landlord creditors) I think that in highlighting certain areas which are, perhaps, most headline grabbing some important areas for review have not received similar attention. Some of the publicity around this campaign suggests that landlords are the unwitting, weak and undefended party in a war which is being waged against them by a united force of IPs and private investors. Quite simply, in my experience, this is not the case. Now it may be that my experience (which I admit is largely at the 'better' end of the retail property market (by better I mean primary and secondary) and involves dealing with the likes of KPMG, PWC, E&Y, BDO, Grant Thornton and others) largely misses out the activities at the tertiary end of the market and perhaps practices at that end are a little more shady. However, my suspicion is that some landlord practices at that end of the market are not quite 'code compliant'. Further by failing to identify the real reasons why the current regime unfairly prejudices landlords over and above other creditors risks losing the war.
The bad arguments
1. It is largely pre-pack administrations where landlords are leant on to agree concessions
This is not the case. A pre-pack is when a deal is agreed and documented (but not signed) before the appointment of administrators. Some of the administrations where landlords have been pressured to give rent concessions have been pre-packs. However, most high profile administrations have not been pre-packs yet rent concessions have been sought by the new buyer. Therefore, the BPF is, in fact and rightly, targeting administrations and not just pre-packs with this campaign.
2. Administrations are effectively being used to transfer funds from pensioners who have invested in property funds and property companies to private investors buying businesses from administrators and then seeking rent concessions or threatening to close down
Using pensioners in any argument seems to be 'de rigueur' at present. I think care needs to be exercised in utilising this argument. Apart from anything else when it comes to unprofitable sites there are arguments that the landlord community carries some of the blame:
- in good times landlords happily agree high rents fully in the knowledge that if trading conditions deteriorate that rent may break the business
- the UK leasing model with relatively long lease lengths, upwards only reviews and full repairing and insuring provisions, whilst providing secure income in the sense of no costs, means that rising service charges add to the burden on tenants increasing the risk of insolvency
- the use of quarterly rents creates cash flow issues for tenants and also creates greater risk for landlords in the light of recent case law
- whilst some landlords have been sympathetic to struggling tenants many others have taken an aggressive route refusing to consider any concessions accusing the tenants of trying to make them pay for a bad business
No one is being forced to do anything. Landlords may not like the threatening manner in which some agents and/or buyers act; saying that unless the rent is reduced a unit will be closed down. But, at the end of the day, the landlord can call their bluff and refuse to agree the concession. Landlords are not above being threatening either. I had one case where a landlord (not institutional) unlawfully re-entered a property through the use of, what can only be described as, thugs because he did not like the possibility of a CVA. That is far more serious than aggressive posturing in a negotiation.
Landlords are big boys and just as able to use an aggressive negotiating stance. As advised in a recent blog landlords have quite a good negotiating position albeit limited by the commercial realities affecting each individual property. In reality landlords are often paying for the fact that they own a property which is not in a prime location and which can no longer command rents at the level originally agreed. If they could get a better rent then they should refuse the rent concession and get possession. That is called risk and, without wishing to teach grandmothers how to suck eggs, that risk should have been reflected in the yield when the property was acquired.
The other side of the coin
The BPF is absolutely right to put the issue of administrations on the public agenda. I think it is important to recognise that there are issues with the system which impact (possibly unfairly) on landlords which should be at the forefront of the campaign:
- the current legal position on payment of rents (especially in the light of the decision in the recent case of the Leisure (Norwich) II Ltd & Others -v- Luminar Lava Ignite Ltd (in administration) & others [2012] EWHC 951 (Ch) gives freedom to tenants not to pay rent and for administrators to trade rent free until the next quarter day. The Game administration is the biggest example of this. This flies in the face of the "pay for what you use" approach to insolvency situations and is unique to leases due to a clash between real estate law and insolvency law.
- the moratorium preventing forfeiture without consent - with all other contracts the provider can effectively terminate the contract on insolvency and there is nothing to stop them from doing it. However termination of the lease can only occur by use of forfeiture which is a form of proceedings. Due to the moratorium such action requires court approval (or administrator consent). This exposes the landlord to greater potential future loss than other creditors who, whilst they might lose out on arrears, are not exposed to further losses unless they choose to contract with the administrators or the new business
Wednesday, 28 March 2012
All that glitters is not Goldacre
In January 2010 I blogged on a very recent decision called Goldacre (Offices) Limited -v- Nortel Networks UK Limited (in administration) [2009] EWHC 3389 (Ch.). In November of the same year I picked up on a Scottish case (Cheshire West and Chester Borough Council -v- Springfield Retail Limited (in administration)) in which the decision in Goldacre was applied and certain parts clarified.
Landlords were very happy with Goldacre. The principle meant that administrators could no longer calculate rent on a daily basis but rather had to pay for the full quarter. However, as I highlighted the decision in Goldacre did create a level of uncertainty. Most importantly it left open the possibility that where an administrator is appointed after a rent payment date and then rent has not been paid that the outstanding rent will be an unsecured claim.
A question answered
That question is unclear no longer. In the High Court decision handed down by His Honour Judge Pelling QC (oral judgment only) it was decided that where a company goes into administration any unpaid rent which fell due before the appointment of the administrators will be an unsecured claim against the company and not an administration expense.
Whereas after Goldacre landlords were jumping for joy many are now holding their head in their hands and here is why. On 26 March 2012 that behemoth of retailers, Game, entered into administration. Whilst I do not know for certain I would countenance that any lease where the rent fell due on 25 March (the March Quarter Day) did not get the rent paid prior to the administration. Those landlords now have no chance of receiving any payment for the quarter from 25 March to 23 June whilst at the same time they cannot recover possession of the property due to the moratorium. Going to court is not attractive as it will now require the Court of Appeal to rule on the matter which means losing at first instance just for the pleasure of some time in front of our learned Law Lords.
A bit of history
In truth the whole episode is a rather sorry tale of a silly issue resulting in unhelpful law. Goldacre was not really about when the liability to pay rent arose. Rather it was about whether administrators should have to pay the full rent when they were only utilising a part of the let property. Up until Goldacre both administrators and landlords operated on the principle that you pay for what you use (i.e. for each day you use the premises the administrators must pay). This is a recognised principle in insolvency law.
The problem is that this principle crashes head-on with the law in relation to rent that rent payable in advance cannot be apportioned (rent in arrears can thanks to the Apportionment Act 1870 - interestingly a piece of legislation enacted for the benefit of landlords who previously could not recover rent arrears having forfeited a lease where rent was payable in arrears).
In effect the court has decided that the non-apportionment principle cannot be overriden by the pay-what-you-use principle and so we land up with a position which neither landlord nor administrator actually want.
Landlords lose out on rent for the quarter in which the administrators are appointed. Administrators risk having to pay for a full quarter whilst only utilising the property for a small part of it.
So who has the upper hand now?
Almost certainly administrators acting for tenants do. There is little doubt that where a company is on quarterly rents payable in advance on the usual quarter days that it can provide the administrators with significant breathing space if any appointment is done immediately after a quarter day having not paid that quarter's rent. The administrators can trade rent free for a quarter. There is little doubt that the two decisions effectively invite companies to do this and, frankly, they would be silly not to avail of the opportunity.
However, in a lot of cases struggling companies approach their landlords much earlier when in difficulty to seek either rent concessions or changes to rent payment dates. Many landlords will simply reject such requests or agree to move to, say, monthly rents or staggered payment arrangements to assist with cash flow. However, landlords would be well advised to use any such approaches as an opportunity to change the balance in their favour. The law is all about when liability to pay arises and if you can change when the liability arises you can avoid suffering unnecessarily when the tenant ultimately goes into administration.
Landlords were very happy with Goldacre. The principle meant that administrators could no longer calculate rent on a daily basis but rather had to pay for the full quarter. However, as I highlighted the decision in Goldacre did create a level of uncertainty. Most importantly it left open the possibility that where an administrator is appointed after a rent payment date and then rent has not been paid that the outstanding rent will be an unsecured claim.
A question answered
That question is unclear no longer. In the High Court decision handed down by His Honour Judge Pelling QC (oral judgment only) it was decided that where a company goes into administration any unpaid rent which fell due before the appointment of the administrators will be an unsecured claim against the company and not an administration expense.
Whereas after Goldacre landlords were jumping for joy many are now holding their head in their hands and here is why. On 26 March 2012 that behemoth of retailers, Game, entered into administration. Whilst I do not know for certain I would countenance that any lease where the rent fell due on 25 March (the March Quarter Day) did not get the rent paid prior to the administration. Those landlords now have no chance of receiving any payment for the quarter from 25 March to 23 June whilst at the same time they cannot recover possession of the property due to the moratorium. Going to court is not attractive as it will now require the Court of Appeal to rule on the matter which means losing at first instance just for the pleasure of some time in front of our learned Law Lords.
A bit of history
In truth the whole episode is a rather sorry tale of a silly issue resulting in unhelpful law. Goldacre was not really about when the liability to pay rent arose. Rather it was about whether administrators should have to pay the full rent when they were only utilising a part of the let property. Up until Goldacre both administrators and landlords operated on the principle that you pay for what you use (i.e. for each day you use the premises the administrators must pay). This is a recognised principle in insolvency law.
The problem is that this principle crashes head-on with the law in relation to rent that rent payable in advance cannot be apportioned (rent in arrears can thanks to the Apportionment Act 1870 - interestingly a piece of legislation enacted for the benefit of landlords who previously could not recover rent arrears having forfeited a lease where rent was payable in arrears).
In effect the court has decided that the non-apportionment principle cannot be overriden by the pay-what-you-use principle and so we land up with a position which neither landlord nor administrator actually want.
Landlords lose out on rent for the quarter in which the administrators are appointed. Administrators risk having to pay for a full quarter whilst only utilising the property for a small part of it.
So who has the upper hand now?
Almost certainly administrators acting for tenants do. There is little doubt that where a company is on quarterly rents payable in advance on the usual quarter days that it can provide the administrators with significant breathing space if any appointment is done immediately after a quarter day having not paid that quarter's rent. The administrators can trade rent free for a quarter. There is little doubt that the two decisions effectively invite companies to do this and, frankly, they would be silly not to avail of the opportunity.
However, in a lot of cases struggling companies approach their landlords much earlier when in difficulty to seek either rent concessions or changes to rent payment dates. Many landlords will simply reject such requests or agree to move to, say, monthly rents or staggered payment arrangements to assist with cash flow. However, landlords would be well advised to use any such approaches as an opportunity to change the balance in their favour. The law is all about when liability to pay arises and if you can change when the liability arises you can avoid suffering unnecessarily when the tenant ultimately goes into administration.
Wednesday, 22 February 2012
Peacocks sold: Seduction again?
Those familiar with my blog will remember my relatively recent blog entitled Blacks and La Senza: Agression v Seduction. Today we are met with the news that Peacocks has finally been sold out of administratio to Edinburgh Woollen Mill. This is good news, especially for the 6,000 people whose jobs have been saved and the 338 landlords whose stores will remain open. It is less positive for the 3100 people who will lose their jobs and the 224 stores that have ceased trading with immediate effect.But do not despair completely for it appears that Edinburgh Woollen Mill has adopted the "seductive" approach to its acquisition vis-a-vis landlords. Philip Day, chairman and chief executive of the Edinburgh Woollen Mill Group, based in Langholm in Scotland, is quoted as saying that he hoped there would be scope to save more jobs and stores from those being forced to close due to performance issues and overhead pressures.
This is a clear statement of intent that once they have had the chance to review all the numbers they will identify further sites they wish to re-open and dangle in front of landlords the carrot of some rent.
Does this mean that seductive approach is now preferred over the aggressive approach or is this just a hangover from Valentine's day? No doubt there will be a few more insolvencies in 2012 that will reveal more.
Tuesday, 17 January 2012
Damned if you do . . . damned if you don't
Reading earlier today the pressure that is being placed on RBS in particular to agree to debt restructuring and help save Peacocks from administration I couldn't help but think how perverse the world is. I am not a fan of the mistakes made by big banks which led to the collapse of the financial world as we knew it. It has left one hell of a mess and the tax payer as owner of a number of rather unattractive assets. However now that we find ourselves in the position of owning or part-owning large banks with significant exposure to numerous enterprises we should be a bit more circumspect regarding what we do with that ownership.
I do not know any of the details of Peacocks or its current financial position save what I can read in the press. The decision-makers at RBS, however, will have available to them a significant amount of information as well as knowledge regarding the past and predicted trading for the business. The decision they need to make with all that information is whether it is in the best interests of RBS shareholders to continue to support Peacocks or whether it would be better to force it into some kind of insolvent restructuring with a view to potentially cutting losses and walking away.
The problem for RBS in particular is that, as a state-owned bank, it is no doubt under immense pressure (perhaps perceived rather than real) not to walk away. I note that Cardiff Central MP Jenny Willott is due to meet Business Secretary Vince Cable later to discuss the retailer's problems. One can predict the questions that would be raised in Parliament if they do walk away:
I have personal experience of this political pressure. I was involved in an administration a while ago involving a bank with significant state ownership. The bank made the right decision to enforce its security over the assets of the business as it had concluded that the owner/directors were unable to improve the performance and their continuing management was detrimental to the business and thus likely to increase the bank's losses. However, the owners involved local MPs and Councillors who wrote aggressively to the senior management at the bank running the argument that it was morally repugnant that a "state-owned" bank would enforce security against the tax payers who "owned it".
Thankfully in this case the bank made the right decision but not without a significant amount of time being spent justifying the decisions to politicians who were more interested in scoring points with their local supporters than protecting the tax payer in general.
Similarly, attempts to stop administrators from seeking to enforce agreements for sale for flats because the value has fallen from when the buyers originally agreed to buy them are just as galling; if buying off-plan was risk free we would all do it. To a certain extent the same concerns must be raised regarding the constant refrain that if we are to exit this economic downturn we need banks to start increasing their lending to small businesses. Undoubtedly this is true. However, I personally, do not want to see the bailed out banks making bad investment decisions just so that they can fill the quotas for lending to small businesses placed on them by the government for good political headlines.
Unfortunately I do not expect the political pressure to disappear and therefore it is most likely that banks will continue to be damned if they do and damned if they don't!
Addendum: As I was writing this blog it was announced that Peacocks has filed a notice of intention to appoint administrators although this has not been confirmed. This does not mean that administrators will definitely be appointed but makes it significantly more likely. If this is the case it will be interesting to see whether my predictions regarding the recriminations will prove correct. Time will tell.
I do not know any of the details of Peacocks or its current financial position save what I can read in the press. The decision-makers at RBS, however, will have available to them a significant amount of information as well as knowledge regarding the past and predicted trading for the business. The decision they need to make with all that information is whether it is in the best interests of RBS shareholders to continue to support Peacocks or whether it would be better to force it into some kind of insolvent restructuring with a view to potentially cutting losses and walking away.
The problem for RBS in particular is that, as a state-owned bank, it is no doubt under immense pressure (perhaps perceived rather than real) not to walk away. I note that Cardiff Central MP Jenny Willott is due to meet Business Secretary Vince Cable later to discuss the retailer's problems. One can predict the questions that would be raised in Parliament if they do walk away:
"Can the Prime Minister explain why the state-owned bank, RBS, failed to save Peacocks from administration wth the loss of thousands of jobs? Is not the minimum that the public can expect from the billions spent on saving the bank that it will not desert its borrowers in their time of need?"What a load of rubbish. This would be typical political spin using the livelihoods (and loss thereof) of voters as a tool to hit the coalition. The taxpayers who own RBS are not merely those employed by Peacocks; they are all of the tax payers. I do not believe any of us would like RBS to make bad business decisions simply because the right business decision will cost jobs. For RBS to have the potential to see itself returned to public ownership it must be allowed to make decisions without concern that political pressure will be brought to bear.
I have personal experience of this political pressure. I was involved in an administration a while ago involving a bank with significant state ownership. The bank made the right decision to enforce its security over the assets of the business as it had concluded that the owner/directors were unable to improve the performance and their continuing management was detrimental to the business and thus likely to increase the bank's losses. However, the owners involved local MPs and Councillors who wrote aggressively to the senior management at the bank running the argument that it was morally repugnant that a "state-owned" bank would enforce security against the tax payers who "owned it".
Thankfully in this case the bank made the right decision but not without a significant amount of time being spent justifying the decisions to politicians who were more interested in scoring points with their local supporters than protecting the tax payer in general.
Similarly, attempts to stop administrators from seeking to enforce agreements for sale for flats because the value has fallen from when the buyers originally agreed to buy them are just as galling; if buying off-plan was risk free we would all do it. To a certain extent the same concerns must be raised regarding the constant refrain that if we are to exit this economic downturn we need banks to start increasing their lending to small businesses. Undoubtedly this is true. However, I personally, do not want to see the bailed out banks making bad investment decisions just so that they can fill the quotas for lending to small businesses placed on them by the government for good political headlines.
Unfortunately I do not expect the political pressure to disappear and therefore it is most likely that banks will continue to be damned if they do and damned if they don't!
Addendum: As I was writing this blog it was announced that Peacocks has filed a notice of intention to appoint administrators although this has not been confirmed. This does not mean that administrators will definitely be appointed but makes it significantly more likely. If this is the case it will be interesting to see whether my predictions regarding the recriminations will prove correct. Time will tell.
Tuesday, 10 January 2012
Blacks and La Senza: Aggression vs Seduction?
Yesterday saw the first of what will most likely be a wave of pre-pack administrations of high street names when both Blacks Leisure and La Senza went into administration and immediately thereafter their businesses (or at least the profitable parts of it) were sold to willing buyers. Pre-pack administrations have come in for a lot of criticism on the basis that they often, if not always, return no value to unsecured creditors or shareholders. However, they have their merits and, in a lot of cases, genuinely achieve the best result possible overall for stakeholders. Therefore, much to the dismay of some readers, I am not about to launch into vitriolic criticism of the use of pre-packs to save jobs and businesses with unsecureds being left high and dry.
There is, however, one common thread of both the La Senza and Blacks pre-packs which are worth highlighting and, as a landlord, preparing for: lease renegotiations. In the case of Blacks, the official press release from JD Sports Fashions stated:
With La Senza, less than half the retail sites leased by the group were bought out of administration with the majority of sites closing down so, it is likely, only the performing stores were part of the original deal. However bearing in mind the official press release which stated:
My prediction is that in both cases landlords will be approached by the new owners to renegotiate lease terms. What we have is a difference in approach from the new owners; one is seeking to pressure landlords whilst the other is seeking to seduce them.
In the case of Blacks the new owners have probably taken a licence to occupy all the sites and will now meet with the landlords of "underperforming sites" to seek to renegotiate the leases. This will be the stick or 'Aggression' based approach; if the landlord does not agree the terms the site will be closed and the landlord left with the void costs, which would include empty rates liability, service charge irrecoverability and an unoccupied site which quickly becomes unattractive.
In the case of La Senza whilst landlords of transferring sites might be approached, bearing in mind the number of up front closures, I anticipate that the new owners will approach landlords of some of the closed sites and propose new terms under which they would be willing to re-open. This is more of a 'carrot' or 'Seduction' based approach offering to relieve landlords of the void exposure.
As a landlord it is important that you are aware of what your negotiating position is in respect of any approaches. It is worth keeping the following in mind (and get detailed legal advice in respect of them where relevant):
There is, however, one common thread of both the La Senza and Blacks pre-packs which are worth highlighting and, as a landlord, preparing for: lease renegotiations. In the case of Blacks, the official press release from JD Sports Fashions stated:
"Following the elimination of any underperforming stores and other cost reduction initiatives we believe the business can be run successfully as independent fascias within the Group."
With La Senza, less than half the retail sites leased by the group were bought out of administration with the majority of sites closing down so, it is likely, only the performing stores were part of the original deal. However bearing in mind the official press release which stated:
"Today’s announcement represents a first step in a long-term commitment to developing the La Senza UK business, which we believe has great potential."it seems likely that 'new' sites are on the cards.
My prediction is that in both cases landlords will be approached by the new owners to renegotiate lease terms. What we have is a difference in approach from the new owners; one is seeking to pressure landlords whilst the other is seeking to seduce them.
In the case of Blacks the new owners have probably taken a licence to occupy all the sites and will now meet with the landlords of "underperforming sites" to seek to renegotiate the leases. This will be the stick or 'Aggression' based approach; if the landlord does not agree the terms the site will be closed and the landlord left with the void costs, which would include empty rates liability, service charge irrecoverability and an unoccupied site which quickly becomes unattractive.
In the case of La Senza whilst landlords of transferring sites might be approached, bearing in mind the number of up front closures, I anticipate that the new owners will approach landlords of some of the closed sites and propose new terms under which they would be willing to re-open. This is more of a 'carrot' or 'Seduction' based approach offering to relieve landlords of the void exposure.
As a landlord it is important that you are aware of what your negotiating position is in respect of any approaches. It is worth keeping the following in mind (and get detailed legal advice in respect of them where relevant):
- an administrator has no right to disclaim or unilaterally surrender a lease or otherwise bring a lease to an end earlier than a solvent tenant (only a liquidator has that power). Therefore rates liability in particular should not fall on a landlord simply because of the tenant going into administration although ultimately liquidation is likely).
- if the property is still being used (and this is particularly important in the case of Blacks) then the lease liabilities arising are likely to be an expense of the administration.
- due to the decision in Goldacre expect there to be significant pressure to get deals done before rent payment dates as administrators in particular will wish to ensure that they can avoid any risk of the next period's rent being payable as an expense in whole. My view is that a challenge to Goldacre or an attempt to extend it is very likely this year.
- pre-conditions or requirements set out in the lease as things which the landlord can rely on in terms of refusing consent to an assignment apply to an assignment by a company in administration just as much as they do in non-insolvency positions. Obviously a balance is to be achieved but if you really do not want to consent to an assignment or the proposed terms don't think you will have no choice in the matter.
- the courts will not be quick to grant consent to forfeiture. In our experience to date courts have given administrators quite a long time to try and assign a lease so even where the proposed assignee cannot meet lease pre-conditions do not assume the courts will be on your side.
Sunday, 1 January 2012
Retail 2012 – a showdown between administrators and landlords?
A very experienced insolvency practitioner who has acted as administrator on some of the most high profile insolvencies of well known British retailers recently mentioned to a colleague that:
.
There is just one small problem with this hypothesis; in reality it is nothing more than window dressing. Put another way, what is being suggested is in effect seeking to simply alter a different variable in a rather complicated equation where ultimately the same final answer always applies:
This equation also highlights another important factor; that of Bank Interest. This affects both retailers and landlords alike and once again highlights that in reality the real issue which is damaging the High Street is debt.
In fact the one common factor affecting all three contributors to the equation (retailers, landlords and, just as importantly, the consumer) is debt. Therefore the IP quoted above could have been more accurate if he had stated that the main problem facing retailers today is that there is too much debt in the economy. So why not say this?
A number of answers spring to mind (in increasing accuracy):
He is right but averages are misleading. In reality there are a lot (easily the majority if not the vast majority) of retail sites where the rent is too high and should be cut. However, there are a lot of sites where the rents could go higher as the landlord could easily re-let the property to another retailer if it became available. Bond Street is an example but so are certain locations on Oxford Street or in major shopping centres such as Westfield London or Bluewater in Kent.
A recent review of the high street predicted a significant increase in the number of retail insolvencies in 2012. The prediction is that those retailers with 50-500 stores will be worst hit. What this is likely to mean is that CVAs which had been utilised a lot in 2007 and 2008 to save a number of retailers (or at least delay their demise by a year or two) is less likely to be successful. If the IP is right in order to survive these retailers will need to do more than simply close sites; they will need to reduce the rents on a significant number of sites that are to remain open. This is yet to be achieved through a CVA and the most well-known attempt at such a large scale CVA routed rent reduction (Stylo in 2008) was a total failure.
Therefore we are more likely to see a significant increase in administrations (as we have already in the last few weeks). The courts to date have provided a significant amount of leeway to administrators by protecting them against claims for forfeiture by landlords even where landlords have been able to show they have alternative tenants to the administrators’ preferred assignee. However landlords have seen some successes; most notably in the case of Goldacre (Offices) Limited v Nortel Networks (UK) Limited. Yet even this decision is now being turned by administrators to their advantage with a refusal to pay any rent for the quarter during which they are appointed on the basis that they are appointed after the quarter day.
My prediction for 2012 is that we will see this issue and many other similar issues relating to the rights and obligations of administrators to make use of premises litigated through the courts. So 2012 may prove bad for the high street but it is likely to provide ripe pickings for the IPs, real estate insolvency lawyers (like me I must admit) and real estate litigators. Every cloud must have a silver lining; at least for some of us.
“The main problem facing retailers today is that rents are too high. Landlords will need to accept that if they want their businesses to survive they will need to reduce significantly the rents payable.”There is undoubtedly truth in what this IP says; if landlords reduced rents then margins would increase and/or retailers could reduce prices to make their goods more attractive to you and me. There we go then; in one foul swoop we can fix the problems of the high street, make British retailers more profitable thus increasing tax revenues for Her Majesty and, as Gordon Brown once said “save the world”
.There is just one small problem with this hypothesis; in reality it is nothing more than window dressing. Put another way, what is being suggested is in effect seeking to simply alter a different variable in a rather complicated equation where ultimately the same final answer always applies:
TRS = RP + BI + LP + BI;
where
TRS = Total Retail Spending;This is obviously an oversimplification of where the money spent on the high street actually goes but it is sufficient to highlight that by reducing rent what in effect happens is that LP decreases so that RP increases.
RP = Retailer's Profit;
BI = Bank Interest; and
LP = Landlord’s Profit.
This equation also highlights another important factor; that of Bank Interest. This affects both retailers and landlords alike and once again highlights that in reality the real issue which is damaging the High Street is debt.
In fact the one common factor affecting all three contributors to the equation (retailers, landlords and, just as importantly, the consumer) is debt. Therefore the IP quoted above could have been more accurate if he had stated that the main problem facing retailers today is that there is too much debt in the economy. So why not say this?
A number of answers spring to mind (in increasing accuracy):
- IPs are generally appointed at the behest of the banks. It would hardly be sensible for IPs to bite the hand that feeds them.
- Banks have already taken significant hits so is it realistic to expect them to take further hits?
- Landlords rely on tenants. If tenants cannot pay the rent then landlords will ultimately lose out. High rents can only be justified if there is a willing tenant.
He is right but averages are misleading. In reality there are a lot (easily the majority if not the vast majority) of retail sites where the rent is too high and should be cut. However, there are a lot of sites where the rents could go higher as the landlord could easily re-let the property to another retailer if it became available. Bond Street is an example but so are certain locations on Oxford Street or in major shopping centres such as Westfield London or Bluewater in Kent.
A recent review of the high street predicted a significant increase in the number of retail insolvencies in 2012. The prediction is that those retailers with 50-500 stores will be worst hit. What this is likely to mean is that CVAs which had been utilised a lot in 2007 and 2008 to save a number of retailers (or at least delay their demise by a year or two) is less likely to be successful. If the IP is right in order to survive these retailers will need to do more than simply close sites; they will need to reduce the rents on a significant number of sites that are to remain open. This is yet to be achieved through a CVA and the most well-known attempt at such a large scale CVA routed rent reduction (Stylo in 2008) was a total failure.
Therefore we are more likely to see a significant increase in administrations (as we have already in the last few weeks). The courts to date have provided a significant amount of leeway to administrators by protecting them against claims for forfeiture by landlords even where landlords have been able to show they have alternative tenants to the administrators’ preferred assignee. However landlords have seen some successes; most notably in the case of Goldacre (Offices) Limited v Nortel Networks (UK) Limited. Yet even this decision is now being turned by administrators to their advantage with a refusal to pay any rent for the quarter during which they are appointed on the basis that they are appointed after the quarter day.
My prediction for 2012 is that we will see this issue and many other similar issues relating to the rights and obligations of administrators to make use of premises litigated through the courts. So 2012 may prove bad for the high street but it is likely to provide ripe pickings for the IPs, real estate insolvency lawyers (like me I must admit) and real estate litigators. Every cloud must have a silver lining; at least for some of us.
Thursday, 6 January 2011
VAT Increases and Snow: The Perfect Storm
It appears that two elements in play in the last couple of months might help create an atmosphere which will result in an increase in the number of retail failures over the next year. One of these is man made and the other a natural phenomenen.
What George Osbourne could not have contemplated at the time of the budget when he decided to increase VAT from 17.5% to 20% was that the UK was going to be hit with the worst winter for decades with much of the country practically shut down during what should have been the busiest shopping period. Whilst the post-Christmas sales might have recouped some of the losses there is no doubting that retailers will have been hit extremely hard and the VAT increase coming immediately after this hit is likely to cause further difficulties - at Christmas people often over extend themselves but with Christmas now over people will be less likely to buy even if they did not over extend themselves.
For retailers this is very much a double blow. It would be wrong to say that the VAT rise will stop people spending but it will limit how much they can buy and/or affect how much of the money spent goes to the retailers' bottom lines.
So, what does this mean?
Unfortunately this must increase the risk of retailers considering or being forced into restructurings. There is already news of HMV closing 60 stores; Clinton Cards and Mothercare have issued negative profit statements with more retailers still to report.
Historically business failures tend to peak after a recession rather than during it as businesses that have used up their reserves just to survive do not return to health quickly enough to replenish those reserves in time. The snow and VAT rise may have created the perfect storm to ensure that history repeats itself in 2011.
What George Osbourne could not have contemplated at the time of the budget when he decided to increase VAT from 17.5% to 20% was that the UK was going to be hit with the worst winter for decades with much of the country practically shut down during what should have been the busiest shopping period. Whilst the post-Christmas sales might have recouped some of the losses there is no doubting that retailers will have been hit extremely hard and the VAT increase coming immediately after this hit is likely to cause further difficulties - at Christmas people often over extend themselves but with Christmas now over people will be less likely to buy even if they did not over extend themselves.
For retailers this is very much a double blow. It would be wrong to say that the VAT rise will stop people spending but it will limit how much they can buy and/or affect how much of the money spent goes to the retailers' bottom lines.
So, what does this mean?
Unfortunately this must increase the risk of retailers considering or being forced into restructurings. There is already news of HMV closing 60 stores; Clinton Cards and Mothercare have issued negative profit statements with more retailers still to report.
Historically business failures tend to peak after a recession rather than during it as businesses that have used up their reserves just to survive do not return to health quickly enough to replenish those reserves in time. The snow and VAT rise may have created the perfect storm to ensure that history repeats itself in 2011.
Thursday, 2 December 2010
JJB warns of financial breach - a threat to the CVA model?
JJB warns of financial breach Online Property Week
This was the headline which is sending shivers down the backs of Landlords across the country whether or not JJB is actually a tenant of theirs for a number of reasons.
For landlords the deal has always been a difficult one. In a retail CVA there are always some properties the company wishes to exit and the landlord is forced to decide between accepting a liquidated damages offer or taking its chances in an insolvency. It seemed that JJB (and others like Focus DIY and Blacks Leisure) had managed to work out the correct level of compensation to pay landlords to get them to agree the CVA.
However, if companies that have been through CVAs begin to fail again a couple of years later landlords are going to be left asking themselves whether the problems facing the company where not really the leases but rather the management or the business itself. Bearing in mind the cost to landlords of considering the CVA terms one wonders whether some will come to the conclusion that it is just not worth it and refuse to back CVAs in the future.
Only time will tell but for now anyway, all JJB's landlords are not sleeping quite so soundly at present.
This was the headline which is sending shivers down the backs of Landlords across the country whether or not JJB is actually a tenant of theirs for a number of reasons.
- JJB, whilst not a bell weather for the retail sector per se, is a large enough retailer that if it is failing to perform it is indicative of issues in the market generally.
- JJB, utilised a Creditors Voluntary Arrangement (CVA) to much fanfare in 2009 - one in a line of large retailers to do so. At the time I considered the reasons why one CVA is successful whereas another is not. Now that the outcome of that CVA is not looking positive Landlords may be concerned regarding the other CVAs which they approved.
For landlords the deal has always been a difficult one. In a retail CVA there are always some properties the company wishes to exit and the landlord is forced to decide between accepting a liquidated damages offer or taking its chances in an insolvency. It seemed that JJB (and others like Focus DIY and Blacks Leisure) had managed to work out the correct level of compensation to pay landlords to get them to agree the CVA.
However, if companies that have been through CVAs begin to fail again a couple of years later landlords are going to be left asking themselves whether the problems facing the company where not really the leases but rather the management or the business itself. Bearing in mind the cost to landlords of considering the CVA terms one wonders whether some will come to the conclusion that it is just not worth it and refuse to back CVAs in the future.
Only time will tell but for now anyway, all JJB's landlords are not sleeping quite so soundly at present.
Tuesday, 2 November 2010
McGoldacre: A Scottish lilt on rent and admin expenses
In January 2010 I posted a blog on the decision in Goldacre (Offices) Limited -v- Nortel Networks UK Limited (in administration) in which the High Court ruled that where an administrator uses a leasehold property for the benefit of the administration on a rent payment day then the whole quarter's rent is payable as an expense of the administration.
Now a court in Scotland has produced a carbon copy in slightly different circumstances. In its decision in Cheshire West and Chester Borough Council -v- Springfield Retail Limited (in administration) the in the Outer House of the Court of Session Lord Menzies held that the fact that the person in actual occupation was neither the administrator nor the company in administration but rather a licensee of the company in administration, was not relevant and that since the licensee had been let into occupation by the administrator as part of a sale of the business then the rent was due as an expense.
Frankly the decision does not come as a surprise. It would be strange if the court had held that administrators could allow a third party into occupation of a leasehold property and that in doing so they would not be liable for the rent as an expense. To do so would create a significant arbitrage opportunity whereby third party licensees could run businesses out of leasehold property of companies in administration where the landlord had no contractual right to rent from the licensee and only an unsecured claim against an insolvent company.
Therefore, in reality the case tells us nothing new and does not answer a number of fundamental questions which the decision in Goldacre raise including:
Now a court in Scotland has produced a carbon copy in slightly different circumstances. In its decision in Cheshire West and Chester Borough Council -v- Springfield Retail Limited (in administration) the in the Outer House of the Court of Session Lord Menzies held that the fact that the person in actual occupation was neither the administrator nor the company in administration but rather a licensee of the company in administration, was not relevant and that since the licensee had been let into occupation by the administrator as part of a sale of the business then the rent was due as an expense.
Frankly the decision does not come as a surprise. It would be strange if the court had held that administrators could allow a third party into occupation of a leasehold property and that in doing so they would not be liable for the rent as an expense. To do so would create a significant arbitrage opportunity whereby third party licensees could run businesses out of leasehold property of companies in administration where the landlord had no contractual right to rent from the licensee and only an unsecured claim against an insolvent company.
Therefore, in reality the case tells us nothing new and does not answer a number of fundamental questions which the decision in Goldacre raise including:
- If the administrator goes into occupation the day after a rent payment day will none of that period's rent be payable as an expense?
- Are dilapidations arising during the period of administration an expense of the administration?
- If there is a sub-tenant in occupation who carries the credit risk of that sub-tenant defaulting? Does it affect the analysis if the company in administration does not continue to use the remainder of the premises?
Friday, 15 January 2010
Rent is an administration expense - but at what cost?
A recent decision in the High Court (Goldacre (Offices) Limited -v- Nortel Networks UK Limited (in administration) [2009] EWHC 3389 (Ch.)) has confirmed that where an administrator makes use of a leasehold property the rent reserved by that lease will be an administration expense. This is in accordance with most practitioners' prior views.
However, the case did decide some other related points which are, in some ways, surprising as follows:
However, the case did decide some other related points which are, in some ways, surprising as follows:
- the amount of rent which becomes an expense of the administration does not relate to the area occupied. Use of a small part of the premises demised will make the whole rent reserved an expense of the administration;
- if the administrator is using the premises on the rent payment date then the whole period's (e.g. quarter's) rent will be payable as an administration expense even if the administrators' use ceases during the relevant period.
These two points could have interesting implications. The corollary of (1) might be that where the premises are part sub-let and the administrators continue to use the other part then it may be that the administrators are exposed to the credit risk of the sub-tenant default. The corollary of (b) might be that where the administrator is not using the premises on the rent payment date then there is no liability for the rent as an expense even if the premises are used for the remainder of the relevant period.
Neither of the above points were directly addressed in the judgment.
It should be noted that the fact that it is now confirmed that rent will be an expense of the administration if the administrators are using the premises does not mean that the administrators have to pay it on the due date and in full. This is still dependent on there being sufficient realisable assets out of which the rent can be paid. This was expressly confirmed in the judgement.
So whilst the case confirms a generally held belief it has muddied the waters for both landlords and administrators in some regards and altered the balance of power slightly but with the administrators arguably still holding the upperhand through the benefit of the moratorium.
Monday, 23 November 2009
Tenant CVAs - what makes them acceptable?
This year has seen a new phenomenon being cemented on to the toolkit of the struggling retailer which, in my opinion, was not anticipated prior to 2009 - the large retailer Creditors Voluntary Arrangement (CVA).
For those not necessarily in the know a CVA is effectively a binding agreement reached between a company and its creditors where the creditors will agree a delayed repayment and/or write-off of debts. The agreement is limited in time (a maximum of 2 years) and is monitored by an independent party. For creditors generally (and most importantly unsecured creditors) the process is preferable over administration or liquidation since in those processes the likelihood is that the unsecured creditors will get little or no p/£ of debt. The attractiveness for secured creditors is that it is cheaper than administration and thus should protect the value of the secured assets within the business whilst they retain their security over them.
The year started off very badly for the CVA when, in February, a CVA proposed by the administrators of the Stylo Group (then owner of the Barratts and Priceless shoe chains) was voted down by its creditors and most vehemently by its landlords. At that point one would have been forgiven for thinking that the view following the Powerhouse decision that CVAs were not appropriate where significant leasehold property interests were involved.
However, since the Stylo CVA proposal was defeated quite the opposite has occurred with successful CVAs being agreed on a number of large retailers including JJB Sports and Focus DIY. The latest instalment is a vote today by the creditors of Blacks Leisure on its CVA proposal. It is anticipated that it will be successful (see FT.com article).
The question is what is different about the post-Stylo CVA proposals that have made them successful where Stylo failed? Is it that the market has changed? Is it that Stylo simply broke a taboo and after venting their anger at Stylo landlords have since been more agreeable?
The answer is most likely a mixture but when you look at the detail of the proposals there is a fundamental difference between the unsuccessful Stylo proposal and the other successful proposals. That difference is money and control.
In Stylo every single landlord would have lost out as the proposal involved changing all rents to a turnover rent initially at 3% increasing to 7% (very low levels compared to normal turnover rents) and without a floor. Landlords were invited to seek to obtain better deals in the market and if successful Stylo could either match the deal or surrender their lease. The good news on the Stylo deal was that there was no landlord immediately facing a closed store with irrecoverable cost. The bad news was that the income landlords would obtain was totally dependent on the performance of the tenant. For stores with little or no likelihood of re letting in the medium to long term this was probably okay as at least void costs were avoided. But for landlords of stores that were in good areas the reduction in rent was unacceptable.
Moreover, Stylo was not guaranteeing that every store would then be safe as it sought an ability to surrender those stores it chose during the life of the CVA. There was to be no compensation to landlords for taking back their stores and no protection from void costs. It is probably this exposure that was the ultimate issue for landlords.
Compare that to the successful CVAs which have some or all of the following features:
For those not necessarily in the know a CVA is effectively a binding agreement reached between a company and its creditors where the creditors will agree a delayed repayment and/or write-off of debts. The agreement is limited in time (a maximum of 2 years) and is monitored by an independent party. For creditors generally (and most importantly unsecured creditors) the process is preferable over administration or liquidation since in those processes the likelihood is that the unsecured creditors will get little or no p/£ of debt. The attractiveness for secured creditors is that it is cheaper than administration and thus should protect the value of the secured assets within the business whilst they retain their security over them.
The year started off very badly for the CVA when, in February, a CVA proposed by the administrators of the Stylo Group (then owner of the Barratts and Priceless shoe chains) was voted down by its creditors and most vehemently by its landlords. At that point one would have been forgiven for thinking that the view following the Powerhouse decision that CVAs were not appropriate where significant leasehold property interests were involved.
However, since the Stylo CVA proposal was defeated quite the opposite has occurred with successful CVAs being agreed on a number of large retailers including JJB Sports and Focus DIY. The latest instalment is a vote today by the creditors of Blacks Leisure on its CVA proposal. It is anticipated that it will be successful (see FT.com article).
The question is what is different about the post-Stylo CVA proposals that have made them successful where Stylo failed? Is it that the market has changed? Is it that Stylo simply broke a taboo and after venting their anger at Stylo landlords have since been more agreeable?
The answer is most likely a mixture but when you look at the detail of the proposals there is a fundamental difference between the unsuccessful Stylo proposal and the other successful proposals. That difference is money and control.
In Stylo every single landlord would have lost out as the proposal involved changing all rents to a turnover rent initially at 3% increasing to 7% (very low levels compared to normal turnover rents) and without a floor. Landlords were invited to seek to obtain better deals in the market and if successful Stylo could either match the deal or surrender their lease. The good news on the Stylo deal was that there was no landlord immediately facing a closed store with irrecoverable cost. The bad news was that the income landlords would obtain was totally dependent on the performance of the tenant. For stores with little or no likelihood of re letting in the medium to long term this was probably okay as at least void costs were avoided. But for landlords of stores that were in good areas the reduction in rent was unacceptable.
Moreover, Stylo was not guaranteeing that every store would then be safe as it sought an ability to surrender those stores it chose during the life of the CVA. There was to be no compensation to landlords for taking back their stores and no protection from void costs. It is probably this exposure that was the ultimate issue for landlords.
Compare that to the successful CVAs which have some or all of the following features:
- No additional store closures over and above those that had already closed (i.e. landlords knew if their site was closed)
- No rent reductions although movement to monthly rent payments
- On closed stores the tenant would continue to pay the rates (landlords were protected from this oppressive liability)
- A pot of money (normally equal to 6 months' rent) was distributed between the landlords of closed stores as compensation
The difference is huge. On the successful CVAs Landlords knew where they stood immediately. Closed store landlords knew that in an administration they would get nothing whereas in the CVA they would get compensation and be protected from void rates whilst the lease subsisted. Open store landlords were asked for concessions which they would probably have given without a CVA.
What the above highlights more than anything else is that timing matters. Clearly, for Stylo to have proposed a CVA along the lines of the successful proposals it would have required significantly more cash to cover the large expenses. This would have meant a CVA being proposed a lot earlier than it was. In the end the timing was wrong. To have a successful CVA you need to have sufficient funds to "buy off" the worst off creditors (i.e. landlords of closing stores). This requires the directors to be brave enough to recognise the issues and see the potential for a better result for creditors and stakeholders alike by taking early pre-emptive action when the company can afford it.
Whether the successful CVAs will actually result in successful companies in the future only time will tell but, at least for the landlords, the CVA was a less bitter pill in the short term.
Subscribe to:
Posts (Atom)