Conditions are currently very challenging in certain parts of the hospitality sector and casual dining has been hit particularly hard. Many well-known brands have suffered due to a significant shift in consumer spending habits and other external factors, including business rates hikes and wage increases, have created a perfect storm.
So how can the hospitality sector weather these conditions? A notable trend in the current climate is the rise in the number of Company Voluntary Arrangements (CVAs). Casual dining brands in particular have been keen to take advantage of the benefits that CVAs offer. Just this year, Jamie’s Italian, Prezzo, Gourmet Burger Kitchen, Byron and Carluccio’s have all entered into CVAs.
What do CVAs offer? A CVA is a way for a struggling business to restructure and/or reduce its debts and outgoings, and it can be particularly useful for businesses with a significant property portfolio. Restaurants and other hospitality businesses trading from a number of different locations can use the process to agree rent reductions for premises they wish to keep, and potentially early terminations of other less profitable sites.
The key feature of a CVA is that if the proposed restructuring is passed it will bind all creditors, even those who voted against it. Landlords often complain that these arrangements affect them disproportionately and unfairly, forcing them to accept lower rents and preventing them from taking action to recover past debts or even taking back their premises. But, the other side to this argument is that the purpose of a CVA is to keep a business out of more formal insolvency arrangements like administration or liquidation and landlords may recover more under a CVA than if the business went under completely.
What are the alternatives? CVAs have been dominating the headlines, but there may be other options for struggling operators to reduce or restructure their property liabilities. Property overheads can be a significant cost to a business, so good legal advice when taking on premises is essential to build in some flexibility that may be needed down the line if conditions change. Tenants with well-located premises may want to assign their leases to another business that wants the site, without onerous conditions attached such as continuing guarantees. A well advised tenant will have negotiated a break clause in its leases so it can exit the lease early, or use the threat of exiting as an opportunity to negotiate better terms with the landlord. Negotiating a rent concession or reduction may be an option and a flexible landlord might allow a move to monthly from quarterly rents, which can help with cashflow and allow the business to survive for the mutual benefit of both parties.
Stevens & Bolton LLP is a full service, top 100 UK law firm. If you have any queries about your premises, what your options might be or would like to know how the Hospitality team at Stevens & Bolton can help your business, please click here to visit our website for more information.
Alternatively you can click here to contact Helen Wheddon, Partner and Head of Real Estate Disputes, directly. Helen advises on all areas of landlord and tenant work and specialises in advising corporate occupiers on their property portfolios.