Outfit change: are CVAs turning landlords into retailers?

Vicki Simpson, real estate insolvency partner at law firm Shakespeare Martineau

With the slew of CVAs from retailers in recent times, including big names like Arcadia Group and Monsoon, commercial property landlords appear to be striking an alternative type of deal in order to strengthen their position, writes Vicki Simpson, a real estate insolvency partner at law firm Shakespeare Martineau:

Due to recent challenging trading conditions, collaboration between landlords and retailers is on the rise and consequently, there could become a time where landlords will be working so closely with their tenants that they, in essence, become retailers themselves. Landlords are being offered profit shares and even stakes in businesses, whilst retailers are seeking rent reductions as part of their CVAs. But are these kinds of agreements the best way forward for commercial landlords?

High rental costs have certainly been a contributing factor in the High Street’s recent troubles and landlords should be working with their tenants to ensure both parties are comfortable moving forward. Ideally, a situation should be reached which benefits both landlords and tenants commercially, although sometimes this may be hard to find.

Landlords can no longer work in isolation and moving forward, a closer understanding of their tenants’ businesses is going to become even more crucial to establishing a mutually-beneficial relationship, putting themselves in the best possible position. By doing so, they can be best placed to identify pain points for their tenants and – where possible – spot trouble well ahead.

This level of collaboration between commercial landlords and tenants is not a new concept. In the past, it was more common practice for landlords to agree turnover rents with their tenants, pinning the success of the retailer to the level of rent charged, by way of sharing risk.

Whilst the mechanics of these kinds of arrangements has altered, it appears that the idea has come full circle and is beginning to be adopted again. Whilst it may be tempting to jump ship upon any signs of a storm, sticking with a current tenant in a case of ‘better the devil you know’ would be a wise move for a commercial landlord. Finding sustainable ways of working going forward may involve agreeing a discounted or turnover rent whereby the success of the retailer has a direct effect on their rental payments.

Largely, the reason landlords have such a great say in the CVA process is due to the huge weight that is placed on rent – often the biggest expense for retailers. Consequently, the deeper the tenant is in rent arrears, the more say the retailer has in the negotiation of CVA terms.

It is no secret that landlords have taken a significant hit from the wave of CVAs and it is likely that there will be some caution around their further use in future. However, CVAs do not have to be detrimental to a commercial relationship. The increased flexibility around these agreements has the potential to allow landlords to adapt to any bumps in the road ahead, hand in hand with their tenants.

Despite heavy criticism, CVAs can be used as a valuable tool, providing landlords approach new options with an open mind, rather than dismissing them out of hand. They give all interested parties a bargaining tool and an opportunity to liaise with each other and look at viable alternatives.

Whilst the current economic and retail trading climate suggests that landlords will potentially have to put up with more uncertainty in future, there are things they can do to strengthen their position. Firstly, landlords must ask themselves whether they want to stick with retail, or whether there may be an alternative use for their premises. Should they decide on the latter, they could take the opportunity to apply through the planning system for a change of use, converting their property to into leisure facilities. For example, a bar or restaurant could make their premises more attractive to tenants.

As economic uncertainty remains at the core of every commercial landlord’s decision-making process, alternative deals must be considered. Challenging trading conditions no longer have to spell disaster for landlords– alternatively, they could provide the perfect climate for future investments, not only in property, but in the relationships that they form with their tenants too.