Retail Insolvencies

2019 was another challenging year for the high street with total insolvencies in the wholesale and retail sector increasing by 3.2% to 1,866 in 2019 Q1-3 from 1,808 in the same period in 2018, the highest for the period since 2013. As a result, there have been record high levels of store closures in 2019. Amidst continuing uncertainty regarding business rates, falling consumer confidence, the rise of the living wage and online competition, the challenging times in retail look set to continue into 2020.

Increasing financial pressure on retail tenants, and the negative impact that CVAs or other forms of financial restructuring may have on landlords' capital values, has led to several distressed property cases coming before the Courts in 2019. These include cases further clarifying the rights of landlords to claim rent and draw deposits in insolvency together with numerous potential CVA challenges (including in relation to Monsoon Accessorize, Regis, Steinhoff (on which Linklaters acted) and Debenhams). 

The judgment in the Debenhams CVA challenge is the most notable of these and provides some helpful guidance that is likely to inform the approach to retail CVAs in 2020. The key points from the judgment to have on the radar are as follows:

  • Future rent under a lease can be compromised – the Judge rejected the argument that CVAs cannot compromise claims for future rent. Had he found otherwise, the value of CVAs as a restructuring tool would have been fundamentally affected and all previous retail CVAs would have been open to challenge. As it is, it leaves the way open to further similar transactions – with reduced risk of challenge.
  • The Debenhams CVA was not unfair on the facts – the differential treatment of landlords and suppliers (whose unsecured debts were also compromised) was justified by the need for business continuity and was not unfair. The CVA would have been unfair if landlords had been required to take reductions in rent to below market rent, but that was not the case.
  • CVAs cannot vary a landlord’s right to forfeit – the right of a landlord to re-enter was a proprietary right and was fundamentally out of scope of a CVA. So, the CVA could not require landlords to waive their forfeiture rights. This acknowledges the importance of a landlord’s proprietary rights and means that any term in a properly drafted lease allowing for forfeiture if the tenant enters a CVA (or other CVA related events) cannot be varied by the CVA itself. This is good news for landlords and may afford them increased leverage in negotiations on the terms of future retail CVAs. 

Ultimately, if a landlord supports the CVA because it represents the best way to secure a tenant’s future, then this decision should not affect how tenant CVA proposals are considered. However, in an environment where there are growing concerns that tenants in distress are seeking to deploy such tools tactically, unnecessarily or too expansively then the guidance provided in this case is extremely valuable and should be kept close at hand.

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