Landlords vs retailers: What the New Look legal case means for future of CVAs
New Look today defeated a legal challenge to its restructuring plan by a group of its landlords in a landmark case that experts say will clear the way for other retailers to use Company Voluntary Arrangements to combat the impact of the pandemic.
The ruling is likely to deepen tensions between tenants and landlords, as the former is emboldened to demand rent cuts and the latter feel increasingly unfairly treated by the courts.
In September last year the high street fashion chain secured creditor approval for a CVA – it’s second in less than two years. At the time it had enough cash to survive for a further month and was facing insolvency, according to today’s High Court judgement.
The CVA would allow it to switch to turnover-based rents at 402 of its UK stores and its remaining 68 branches would not be charged rent.
Under the proposals, property owners also had enhanced breaks to allow them to exit the lease if they can find a different tenant on better terms.
However, some landlords challenged the plan, arguing that a CVA cannot treat different groups of creditors differently and that the modifications to New Look’s leases were unfairly prejudicial to property owners.
The court today found in favour of New Look, in a landmark judgement that will set a precedent for retailers and allow them to continue using CVAs to restructure their store portfolios and switch to rents based on sales.
“Bruising outcome” for landlords
Some experts have argued that the decision will unfairly shoulder landlords with the financial burden of retail failures going forward.
Katherine Campbell, head of real estate disputes at Reed Smith, says the decision was “inevitable given the extent to which the legal deck is stacked against landlords”.
“Setting the precedent of a turnover-based rent system let the genie out of the bottle, and there likely won’t be any success now in putting the stopper back in,” she says.
“To mount a legal challenge, the landlords argued that the switch to a turnover-based system ‘fundamentally rewrites’ leasing agreements in a way that has never been done before and is ‘unfair.’ The judge disagreed, in a judgment that will only see landlords confirmed as the piggy banks of the slowly recovering retail sector.”
In Debenhams’ CVA challenge which went before courts last year, the judge saet the bottom line for rent reduction at “market rent”.
However, the latest judgement saw landlords refused requests for a “bare minimum rent”.
“Even this fell on deaf ears,” Campbell adds, “to say the outcome is bruising might be an understatement”.
However, despite the fact that the ruling “tips the balance further in the favour of retailers”, it is “ultimately a pragmatic response from the courts”, says Joanna Ford, partner at Cripps Pemberton Greenish.
Avoiding insolvency
In the case of New Look, the alternative to a CVA would have been insolvency, resulting in lost jobs and further losses for creditors.
“Whilst landlords complain that the changes, now endorsed by the courts, are deeply unfair, arguably it is simply a reflection of the economic fall-out of the pandemic and many may feel that it rightly shares the pain across the whole of the retail sector,” Ford says.
“It is ultimately a pragmatic response from the courts, allowing retailers to get back on their feet and generating future revenue for landlords. It is also worth remembering that in many cases the alternative to a CVA would be insolvency, with landlords recovering nothing and being left with an empty store, as in the case of Topshop.”
Storm brewing
The High Court is yet to make a decision on a similar challenge by landlords of high street salon chain Regis. When that judgement is handed down, the impact of the New Look case will become more clear.
What is clear though, is that bad feeling between landlords and retailers looks set to increase before it improves, as the judgement could spark a further wave of CVA’s as tenants feel the courts will rule in their favour.
Clare Kennedy, a managing director at consulting firm Alixpartners, says the “ruling should provide a greater level of certainty around the process and, as government support tapers down, could lead to a higher number of CVAs, as businesses look to tackle both rental arrears and the shift from bricks to clicks.”
As Reed Smith’s Katherine Campbell says, “in the battle between landlords and retailers, the current winds are certainly blowing up a storm.”