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The fascinating truth about the rise of the CVA and what this means for the high street’s struggles

Posted by , Partner

As retail and restaurant brands struggle to adapt to an increasingly uncertain economic environment, Company Voluntary Arrangements (CVAs) have become more common, and more prominent in the news. But what does this even mean for retailers and landlords? Are they a vital lifeline, or are they just adding pressure to a sector that is already showing concerning signs?

CVAs on the high street

Toys “R” Us and Maplin have disappeared entirely, House of Fraser is reducing its footprint by 50%, Mothercare by 30% with even high street giant M&S is feeling the pinch. The restaurant sector is not immune either, with Jamie’s Italian, Byron Burger, Prezzo, Carluccio’s and others all tightening belts.

Are CVAs a sign that the high street is in decline?

Rising property costs affect all, but each are facing their own problems. The casual dining sector is saturated following a period of over-expansion with little to differentiate one restaurant from another. Brexit and increasing labour costs have compounded the problem.

The impact of online retailing on the high street is well documented but is not the only issue facing retailers. Poor management, customer experience and location choices by some of our retail staples – Homebase and Toys “R” Us two good examples – are likely to have hastened their demise.

But there is another hand at play. The concentration of ownership by private equity investors looking to extract cash at the expense of proper investment has had a detrimental effect.

Are CVAs actually becoming more common?

CVAs are on the increase. In the first three quarters of 2018 over 290 CVAs were reported – an increase of around 20% on the previous year. But it should be noted that 2017 was a historically low year for CVAs. In the last 5 years, there has been a total of 552 reported CVAs.

They are proving popular as they give a company time to restructure and re-evaluate a business. A CVA can stop tax payment pressures, terminate lease liabilities and employment contracts and are not publicly advertised, all whilst allowing the directors to continue to run the business.

But there are downsides. The business will have no credit rating making it harder to secure terms with suppliers and lenders. Monthly payments need to be made, often over many years. They cannot be put together quickly, and 75% of creditors by value must agree.

And not all CVAs are successful. A report by R3, the insolvency trade body, showed that of these 552 CVAs, 65% were terminated without achieving their aims, 16.5% were still ongoing after five years, with only 18.5% completed within a five-year window.

Are CVAs a concern for landlords?

Landlords are increasingly vocal when expressing their concerns over the increased use of CVAs and the impact they can have on other tenants. Next has publicly said that it would expect any discount offered to neighbouring tenants through a CVA to be extended to their stores as well, adding further pressure on landlords.

So what should a landlord do? In the first instance, a landlord should value its claims, and then vote on proposals. Submitting a claim will preserve the ability to challenge the CVA at a future date. If unhappy with the decision of the Chairman, make sure those objections are noted. And consider whether the position of the landlord has been prejudiced.

Whilst a CVA is legally binding, landlords retain other rights including forfeiture, surrender, collection of future rents, and breaches of planning, insurance and health and safety regulations.

The British Property Federation has, in support of landlords’ concerns, called for an urgent government review of the CVA regime, suggesting that they are being over-used and perhaps abused.

Pressure in the kitchen

Restaurant numbers have soared over past four years, competition for sites has led to high premiums and increasing rents. It has proved unsustainable. The market is going through a period of adjustment through distressed sales and CVAs.

Over 1,200 restaurants closed over the last 18 months, with rents down 30% and premiums by 50%. Household names including Jamie’s Italian, Byron Burger, Gourmet Burger Kitchen, Prezzo, Carluccio’s are struggling. But there are some still holding strong: Nando’s, Wagamama, The Ivy Connection, and Five Guys continue to go from strength to strength.

Restaurants have and always will play an important role on the high street and retail destinations, and both landlords and their tenants need to create the experience customers increasingly look for.

Landlords need to truly understand their tenants’ business and better manage the tenant mix. Too many restaurants with similar themes will soon leave a stale taste in diners’ mouths. Turnover rents can play a useful role, providing greater visibility and early warning signs.

The future of the casual dining sector remains positive. Millennial consumers eat out more often and seek new experiences, but their average spend is lower. And whilst the London market is saturated, regional locations are buoyed by thriving independents. A resurgence in the pub which can change its menu daily is also attracting investor attention.

Home delivery will increasingly play a key role, growing 20 times faster that dining out. Casual dining brands will respond with greater use of technology to enable in-store and online ordering, a greater focus on health and sustainability, more memorable experiences for the online generation, and a greater level of community engagement.

A special thank you to Stephen Katz from David Rubin & Partners, and Simon Chaplin from Christie & Co. for their help, expertise, and collaboration with this article.

For more information about CVAs contact Jamie Lester at Royds Withy King

0207 583 2222     Email usjamie.lester@roydswithyking.com

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