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 difficulty.   

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. 

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