Curse of the CVA mars strong start for retail
Posted by Estates Gazette on 27th Jan 2017
Last year was full of surprises and already in 2017 the retail property industry has shot out of the starting blocks with a little surprise of its own: an almost complete lack of tenant failures following December quarter day – a time of dread and fear for landlords in previous years.
And this was despite some almost apocalyptic predictions from some seasoned retail watchers.
Indeed, there is a slight smell of burning in Mayfair caused by the flambéed fingers of numerous hedge funds caught holding short positions against a swathe of the high street, in what turned out, with one notable exception, to be a bumper results season.
The only significant tenant failure has been the recent announcement of the proposed company voluntary arrangement by The Food Retailer Operations Ltd. As reported by EGi (13 January 2017), these are 74 former Somerfields, acquired as part of the wider group in 2008 by Co-operative Group, then sold to Hilco-controlled entity six months ago.
This is unusual for two reasons: firstly, it is struggling operation in the booming convenience sector; and secondly, there has been some disquiet around the use of this controversial process for stores which, until recently, were owned by a business that prides itself on its ethics.
In respect of convenience retailing, this is a timely reminder that even in a sector which saw growth of almost 25% from 2009 to 2014 and is expected to show growth of 27% from 2015 to 2019, according to figures from Verdict, a badly executed offer in poor or expensive locations will still fail – as Morrisons found out to its cost.
The proposed CVA follows the well-worn format of classifying these shops into groups and then specifically targeting the landlords of these stores as “unpreferred” creditors. This is a strategy that many landlords find unacceptable and contrary to the legal principle that a CVA should not create “unfair prejudice”.
At this point, it is worth declaring that Ellandi does not own any of the affected stores, but as the UK’s fourth largest shopping centre owner, we have skin in the game to the extent we want to promote better relationships between landlords and tenants and fair business practices in our industry.
A look at the list of affected property owners reveals that the majority of the affected stores are owned or controlled by individuals. They are likely to have bought these investments for their pensions, feeling secure in the knowledge that they had long leases secured to Somerfield and subsequently the Co-op, whose long, distinguished heritage and reputation stretches back to 1863.
They will feel aggrieved that once again the CVA procedure is being used to reduce contractual rental commitments while other creditors are being paid in full; their interest demands will still roll in each quarter.
Without significant fresh investment from the owners of the business or new strategy, why should they effectively be providing working capital, with no real upside, to a business that may well fall over again?