Company Voluntary Agreements (CVAs) are a type of insolvency used by retailers to reduce rents or shed underperforming stores. Christmas trade updates are starting to filter through from retailers and early signs suggest that things were not as bad as some predicted. However, this came at a cost, with retailers cutting prices earlier and for longer to attract customers.
It seems almost inevitable that 2020 will see more CVAs. One can sympathise utterly with those retailers that are not exploring CVAs: why should failing businesses benefit from rent cuts when those that do it well are not rewarded? But the narrative that assumes the ‘good’ pay for the ‘bad’ is not sustainable.
CVA clauses in leases, which would automatically introduce rent cuts for tenants in the event that their neighbour pushes through a CVA, risk divorcing the rent from the market. CVAs are not a negotiation, landlords are just one creditor group in the process and often one that does not have the collective bargaining power to stand against proposals. CVA clauses in leases would make the income from shopping centres subject to potentially wild swings which, in turn, makes them riskier to own and more challenging to value. Added to that, the current provisions of the 1954 Landlord and Tenant Act means that CVA clauses could become an ever-present fixture once adopted.
"So what?" you might ask. The problem comes in the knock-on effect. If the income for a shopping centre is uncertain and the value fluctuates accordingly, the owners, and these are often local authorities or pension funds, cannot invest the required capital to ensure that the shopping centre is fit-for-purpose. The result is a whirlpool effect where uncertainty breeds a lack of investment which makes the environment less pleasant for shoppers, so they do not come. Fewer shoppers means stores struggle, closures and CVAs are more likely. So the income reduces and there is less investment, more boarded up shops, so fewer shoppers want to come. And the cycle continues.
What is required is better collaboration between landlord and tenant. The 1954 Act needs reforming, the CVA process needs a proper challenge and review, and landlords and tenants need to work together, share information, look sensibly at turnover rents and ensure that the physical estate of retailers is attractive to consumers and part of the wider brand story, supportive of the whole business rather than just one small part of it.
We are seeing those successes play out in some of the towns we look after by engaging in this collaborative approach. Bringing together land owners, retailers, the local council and other stakeholders to make places more effective and create a better environment for a new, positive model for retailing. This isn’t the death of the high street, it’s just the next chapter in its evolution.