Being a retail- and leisure-focused agent, most of my waking hours and many of my nightmares revolve around three letters – CVA.
There has been a lot written about this topic in recent weeks, and opinions are more polarised on this than any other subject that has confronted these sectors over the past few years.
We have seen debates range over whether CVAs are just a convenient way for an occupier to shed stores and occupancy costs or a genuine means of saving businesses that are struggling to adapt to the new retail and leisure world.
Being a humble chartered surveyor, it is not for me to comment on whether a CVA is smart accountancy or a genuine lifeline. Ultimately, this will be judged by whether House of Fraser, New Look, Byron et al prosper in the future. However, it does have significant ramifications on the life of an agent and our clients – whether they are tenants or landlords.
CVAs in focus
Fundamentally, the leases that struggling occupiers are looking to amend, or exit, were binding contracts entered into by two parties with their eyes open. The criticism that landlords are not forward thinking enough could also apply to tenants who, in their desire to grow turnover, have committed to lease structures that easily outrun the length of their business plans. This is exacerbated by the VC ownership model – where invariably the goal is to grow turnover quickly and release equity by injecting debt and selling the business at a profit.
Conversely, it is interesting that some of the ‘best’ retailers on the high street are owned predominantly by their families, or their staff, for example H&M, Zara, River Island and JLP. These businesses have a longer-term view that allows them to reinvent themselves to keep up with changing consumer demand. Equally, these businesses are now being penalised for their strong performance by landlords being forced to subsidise their struggling competitors – a point well made by Lord Wolfson over recent weeks.
This raises interesting questions about how the UK market leases space and what landlords/developers, tenants and consumers want in the future. This provides an opportunity for the industry to reinvent the way it deals with leases to create a model that encourages all parties to work together and change their approach, specifically:
- Retailers need to understand that their landlords need a rental income if they are to invest further in creating shopping and leisure environments that generate the maximum return for both parties;
- Agents need to be creative in terms of how deals are structured and understand that different retailers and landlords have different criteria and avoid reinventing the same deal repeatedly;
- The industry needs to relook at how we value to reflect the new occupation model.
Moreover, the CVA process would appear to make a mockery of the Landlord & Tenant Act 1954 – the clue is perhaps in the name of this piece of legislation. One of the most positive outcomes from the current CVA process would be if the industry accepts (at least with the multiple retailers) that the act needs to be dispensed with. Taking away the automatic right to renew would encourage retailers to take longer leases, giving landlords the capacity to relook at their valuations and invest further in their assets.
As we are always being told, the retail and leisure market is evolving at a rate that has never been seen before. We need to adapt to this and an archaic piece of legislation designed to protect small, independent businesses from old-fashioned landlords does not help the process.
As an industry, we need to be more innovative and accepting of both the landlord’s and tenant’s long-term goals, rather than the current polarised position of rental growth where the market is booming and overreaction in tougher times.