Morgan Garfield writes for Estates Gazette : CVAs are not always a cure
Posted by Estates Gazette on 22nd Apr 2016
BHS has successfully completed a company voluntary
arrangement processes that its management team hopes will allow the business to
be turned around. I hope they are successful, for the sake of the 11,000
employees, rather than the owners (who reportedly only have £1 at risk). Sadly,
I fear the CVA will be the easy step and turning around a large, under-invested
business far harder.
The CVA only disadvantaged landlords, with the process
forcing rent reductions on 87 stores (54% of the estate) and effectively giving
BHS the right to walk away from 40 of these. Other creditors remain entitled to
full payment, although it seems likely the pension scheme will transfer to the
Pension Protection Fund and become the taxpayers’ problem in due course.
Credit analysis required far greater thought than the
industry applies at present. When underwriting a long-term lease, you need to
assess the tenant’s capacity to meet its obligations for the entire term.
This requires a landlord to consider a tenant’s balance
sheet, equity make-up and debts, profitability, cash generation, competitive
position, management team and capability to raise capital in times of
An obsession with WAULT (weighted averaged unexpired lease
term) can detract from a true analysis of the market rental value and competitive
position of an investment.
Many BHS landlords will find that they now own a large
old-fashioned department store with several upper floors that will require
significant redevelopment capex.
It is now relatively easy to orchestrate a CVA or a pre-pack
receivership. A company experiencing financial hardship can implement a restructuring
to shed creditors, and landlords are often the number one target. Many would
argue that you don’t need to be truly insolvent to do this – a good proportion
of restructurings are driven by commercial benefit to the owners rather than to
genuinely save the business and resultant jobs.
The insolvency regime has effectively changed the terms of
engagement for landlords and a long lease does not provide the certainty it
used to. This calls into question whether the rule book should be revisited.
The Landlord & Tenant Act 1954 requires significant amendment.
I would question whether a tenant’s right to security of tenure now gives rise
to a one-way option. If the tenant trades well, it can renew the lease at court
in an increasingly accommodating environment, while if it trades poorly, it can
restructure and cancel a lease, regardless of its contractual obligation.
Landlords are more exposed to the success of their tenants
than ever. So we must recalibrate how we view tenant relationships, something Ellandi
is passionate about. In many cases, it would be better to agree to shorter term
more flexible leases with shared information provision, in regards to turnover and
sales, as is found in most other mature real estate markets.
It seems the biggest barrier to more cooperative
landlord/tenant relations is a 62-year-old bit of legislation that is no longer
fit for purpose. At a time when there is much debate around over-regulation
driven by Brussels, it is ironic that one of the most restrictive pieces of
regulation in our industry is very much homegrown.