Landlords face New Look to retail leases

The UK’s beleaguered economy received a timely boost this week with the news that New Look had reached a company voluntary arrangement (CVA) with its creditors. The agreement safeguards 11,200 jobs but is likely to give landlords a migraine sized headache and could change the way retail leases are dealt with for good.

CVA’s have almost become commonplace – this is New Look’s second in 3 years – and typically they result in shop closures, job losses and a fulsome restructuring of the business involved.  Not so this time.  Crucially, for the retail sector and landlords alike, the deal grants approval for New Look to switch 402 of their store portfolio to turnover rents.  This means that landlords will have to accept a percentage of the store’s revenue as opposed to relying on a fixed rent in the lease.  Rent on these stores will be charged at between 2% and 12%.   The fashion brand’s remaining 68 shops will switch to zero rent although they will remain liable for business rates and service charges.

The CVA ruling is a lifeline for the women’s fashion chain whose revenues had slumped during lockdown.   Despite reopening their doors sales remain down by 38%.  The company is carrying a heavy burden of debt, thought to be around £550m, which its chief executive, Nigel Oddy, aims to reduce to £100m and slash their interest payments. The CVA breakthrough will see £40m of new funding pumped in to redress its balance sheet and secure a debt for equity swap. After an outcome like this perhaps he should change their name to Brighter Outlook.  But, where does this leave landlords?

Speaking prior to the CVA meeting, Oddy said: “The proposal to landlords is to rebase our rental cost base through a turnover-based model that aligns future performance and reflects the wider retail market.

“We remain committed to the high street and serving our customers through our portfolio of local, conveniently-located stores in towns across the UK,”

You may consider this last comment a ‘boost’ for the sector; a major high street occupier showing faith whilst others are shutting up shop. It is a timely shot in the arm given that failure to agree a CVA would have resulted the collapse of a major high street retailer, significant job losses and over 400 empty stores. But, the impact of this ruling on the wider retail and property market cannot be underestimated and sets a firm precedent. It is likely to result in others seeking similar arrangements, particularly large retail players with multiple outlets. 

Turnover rents in the retail and leisure sector are not uncommon but traditionally landlords and their lenders have resisted this model preferring income to be based on open market value with upward only rent review patterns.  Now the parties will be intrinsically linked: we lose, you lose. And vice versa.  It will be fascinating to see how landlords approach this when many tenants currently feel they have the upper hand.

New Look didn’t get it all their own way, however.  The company agreed to one off payments and the insertion of multiple lease breaks on a number of stores allowing landlords to exit contracts if they find a tenant who can pay more rent. 

If you’re a landlord who requires advice on your retail property, contact one of the commercial team at Allied Surveyors Scotland.