Struggling to make retail units profitable, many retailers are seeking to reduce costs by negotiating reduced rents or shifting to turnover based rents.
Management of smaller groups may be able to renegotiate leases individually with landlords. But how can retailers proceed if they can’t reach agreement with all landlords, or have a large lease portfolio making lease by lease negotiations impractical?
One approach is to use a CVA – as outlined in our earlier item [link to Sophie B’s piece]. However, the increasing resistance from landlords can make these complicated and expensive to implement. Commonly, the solution is through a pre-pack. That is, essentially, a business asset purchase negotiated with a prospective administrator and completed immediately on the administrator’s appointment. Under a pre-pack, the buyer has flexibility to exclude the sites which they do not want and so avoid paying rent for less profitable outlets. But reducing rent or changing rental terms on sites the buyer does want is not straightforward in a pre-pack.
Typically, the buyer would, immediately after the pre-pack, go into occupation of a site under an occupational licence, while the consent of the landlord to assignment of the lease is sought. Commercial lease terms usually provide that the landlord cannot unreasonably withhold consent to an assignment. That may give the buyer under a pre-pack a degree of confidence that they can obtain consent to assign the lease, particularly where landlords are increasingly worried about becoming responsible for business rates (which is strong leverage for tenants while landlords do not benefit from the rates holiday) and other property costs if a lease is terminated. If landlord’s consent is not given to the assignment, the landlord may, subject to navigating around the administration moratorium on lease terminations, be entitled to bring the lease to an end.
Buyers should be aware that they may need to provide additional security (such as a rent deposit or guarantee) as a condition to the assignment of the lease. It should also be remembered that landlord’s consent to an assignment of the lease does not necessarily mean that the buyer will be able to negotiate any variation of the lease to improve its terms. The landlord will typically have an absolute right to refuse a request to change the terms of the lease, whether to reduce the rent, change to a turnover based rent or otherwise. Payment of arrears, including any that relate to the period before the administration, is a common negotiation point for landlords.
Unless revised terms can be agreed with the landlord, the buyer will be required to take the lease on its current terms, including the level of rent and liability for arrears.
The interaction between temporary restrictions on commercial evictions and winding up petitions during the pandemic can lead to delicate assessments of risks. Many struggling retailers are not paying rent in full, while landlords have limited remedies – although failure to pay current liabilities can raise directors’ duties concerns. However, under a pre-pack deal buyers may not be able to improve lease terms and could be required to pay arrears as well as ongoing rent.