Company voluntary arrangements and turnover rents

Frettens’ resident insolvency guru, Malcolm Niekirk, takes a look at an emerging hot topic in both insolvency and commercial property: the move to turnover rents. 

Turnover rents and CVAs

It’s Thursday 3rd December 2020, and so far this week Arcadia (TopShop, Dorothy Perkins, Burton, Miss Selfridge, Evans and other brands) and Bonmarche have gone into administration, and Debenhams (already in administration) has gone into liquidation.  Less widely reported was the Clarks’ company voluntary arrangement (CVA).

High street shops have taken a battering recently, with many blaming the move to online shopping as well as the effects of the pandemic.

The Clarks’ CVA highlights one effect of the widespread financial distress in retail; the move to turnover rents. 

Do commercial landlords have to accept a turnover rent proposal in a CVA?

A CVA is a very flexible insolvency procedure.  It’s used by insolvency professionals to restructure struggling businesses with the intention of restoring them to healthy profitability. 

It’s a bit like a contract the company offers to its creditors (and other stakeholders).  If enough accept it, it will bind all creditors and the company to work together – and usually share financial pain – to turn around the fortunes of the business.

Changing to turnover rents in commercial leases

Clarks’ CVA is unusually focussed on Clarks’ landlords.  Although all creditors got to vote on it, it affects the landlords of the shops more than other creditors.  Along with other concessions, many landlords are having to change the terms of their leases to turnover rents.

What is a turnover rent?

A turnover rent is – as the name suggests – based on the turnover generated from the premises by the tenant.  So financial risk and reward is shared between landlord and tenant to a greater extent than under traditional commercial leases.

When the tenant’s business does well, and their turnover rises, the shop rent they pay will increase.  But when the business struggles, and turnover falls, the landlord will receive less rent.

You can read my colleague Fiona Knight's Guide to Turniover Rents here. 

Clarks shoes move to turnover rent

The Clarks’ CVA was not a last-ditch desperate attempt to save the business.  It was part of a well-planned package of changes, including substantial new finance.  However, it is clear that the new investors would not have committed their money unless the company changed the terms on which it rents its shops.  And, without the new finance, the company’s future is bleak.

Turnover rents: An insolvency solicitor’s view

This shows that, increasingly, business owners are successfully challenging assumptions about the terms on which property owners will let their property.  Businesses that are not renting on turnover rents may feel that they are at a competitive disadvantage and look for more flexible arrangements, particularly when taking on new premises or renewing existing leases. 

Quite possibly the pressure for turnover rents may spread to other types of premises (outside the retail sector) and landlords may have to consider how much flexibility they are able to offer.

Insolvency & Restructuring Solicitors near London, in Hampshire & Dorset, near Southampton and in Bournemouth, Poole, Christchurch and The New Forest

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