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Can Landlords Help to Keep Some Companies Afloat?

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It was announced recently that the future of JJB Sports has been secured after 99% of its landlords and other creditors approved proposals to save the struggling sports retailer from administration.

JJB proposed a company voluntary arrangement (CVA) under which rents will be paid monthly on 250 profitable stores and the landlords of 140 closed stores will each receive six months' rent in settlement of all liabilities. JJB say the success of the CVA will safeguard around 12,000 jobs.

As economic conditions worsen, more commercial landlords are receiving requests to restructure existing lease arrangements from tenants needing to reduce costs and improve cash flow. These landlords have a difficult dilemma: agree and suffer a drop in rental income and probable devaluation of the property or refuse and risk the tenant becoming insolvent, leaving a vacant property and rent arrears.

As Paul Gibbon of Keeble Hawson's Commercial Property team explains:

"Landlords may feel that receiving something is better than receiving nothing. Looking at the longer term bigger picture, they may also wish to assist tenants during these difficult times. However property owners have been adversely affected by the downturn too. Most have seen significant devaluation of their assets and will have their own creditors and shareholders to answer to."

"They need to ensure that the tenant is genuinely in difficulty rather than simply using the recession as an excuse to cut costs. Therefore, enquiries into the legitimacy of a tenant's alleged problems may be necessary. With a CVA, this is quite simple - a CVA is a statutory procedure, supervised by a licensed insolvency practitioner and an inherent level of transparency is therefore built into the process."

Amongst other key points that need to be considered are the following:

  • Where a tenant trades from multiple sites, landlords will also want to ensure that if they accept the proposals, the other creditors follow suit. If not, the tenant may default anyway leaving the landlord in an even worse position. Therefore, ensure that the terms being proposed are also being put to the other landlords and make any acceptance on your part subject to agreement from the other landlords.
  • Where a CVA is proposed this will not be such an issue because a minimum of 75% of unsecured creditors must approve the deal for it to become binding.
  • Finally, looking at the other side, if you are a tenant considering a proposal to your landlord, suggesting moving from quarterly to monthly rental payments is a good place to start. This removes the tenant's need to finance key spikes in cash-flow and landlords are more likely to agree this than a request for a reduction in rent which may not get approval from the landlord's lenders or shareholders.

In essence, any proposal needs to be a real compromise and sufficiently attractive to compel landlords to accept it. JJB's success was largely due to the fact that its proposal gave landlords, particularly those subject to store closures, tangible improvements over the situation they would have been in had JJB gone into administration.

For further information contact Paul Gibbon by email: paulgibbon@keeblehawson.co.uk or direct telephone: 0114 2906203.

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