Next uses CVA arrangement to attempt clause change in property leases

Struggling retailer Next is one of a number of businesses on the high street dealing with a general downturn in consumer spending, which has led some in the sector to enter into company voluntary arrangement (CVA).

Big names such as Carpetright, New Look and Toys R Us have all entered into CVAs in the last year in an attempt to reduce debts, cut costs and restructure their business to avoid administration. In fact, in the year to March 2018 there were 15 retail CVAs.

A CVA allows an insolvent company to reach a voluntary agreement with its creditors regarding repayment of its corporate debts, which many have used to ask for significant rent reductions that may not have been possible under existing terms with landlords that mandate upward-only rent reviews.

Upset with the arrangements offered to its competitors, albeit via a form of insolvency, Next is understood to have sought to incorporate a new clause in its leases that would require landlords to agree to rent reductions on stores where a neighbour receives a similar deal through a CVA.

Landlords, already affected by the high number of CVAs on the high street, are understood to be concerned about this new development.

Ian Fletcher, Director of Real Estate Policy at the British Property Federation, said: “Next’s request illustrates how far the CVA process is at risk of being misunderstood or misused. It’s nonsense to suggest that a process designed to try and keep a sinking ship afloat should be applied to healthy businesses.

“Also, where does this end? A CVA often allows a business to cut what it pays in business rates or renegotiate the terms agreed by its banks. Will Next also seek these concessions?

“Ultimately, requests as such by Next undermine the CVA process, which was set up to ensure businesses facing insolvency have a chance of survival and do not disappear from our high streets.”

It is not yet clear how many leases will be affected by Next’s new CVA clause, but it is likely to influence other businesses on the high street seeking similar arrangements.

If you are concerned that your retail property portfolio could be affected by this new clause, please speak to our team today.

This article is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking or deciding not to take any action.