Alex Jay writes for Accountancy Daily on various scenarios for companies looking to restructure their office space in the wake of the pandemic and subsequent re-evaluation of the use of office space.
It is hard to predict where the cards will fall around office space. Opinions vary from a draconian shift to home working to a more nuanced adjustment of how office space is used. However, there appears to be a commonly held view, summed up well by McKinsey, that most organisations will ‘boldly question long-held assumptions about how work should be done and the role of the office’. Anyone who has ventured into the City of London during the pandemic will have seen the empty buildings. Yet, professional services firms (lawyers, accountants, banks) have broadly maintained their services with little interruption.
A significant re-imagining of the office could have an impact on the retail and hospitality trade that relies on workers to eat and shop near their office. Add that to the pressure already faced in that space, and it is obvious something will have to give.
Recent CVAs
Recently company voluntary agreements (CVAs) have been frequently deployed in the hospitality sector, for example, Caffé Nero, Pizza Hut, Pizza Express and Revolution Bars. CVAs are a tool designed to enable a restructuring of a business that cannot meet its obligations to creditors.
The retail sector has also had its fair share, including New Look, Jigsaw, and Edinburgh Woollen Mill. These CVAs have mainly focused on reducing one of (if not the) biggest overhead for those businesses: rent.
Caffé Nero, which owns around 800 stores in the UK, has had a CVA proposal approved by creditors. This has upset its landlords as they are required to forfeit most of their outstanding rent under the proposals. A challenge has been lodged by the landlord group and reportedly now has Lord Alan Sugar’s support.
New Look also has a CVA proposal approved by creditors in September 2020. This important turnover rents on landlords and has reportedly been challenged by a group of landlord creditors, including British Land and Development Securities.
More bad news for landlords?
More recently, Thorntons announced it will not maintain its physical stores post the pandemic. John Lewis has announced the closure of eight stores. This may well be the tip of the iceberg.
Ultimately, companies that need to reduce their premises space, for one reason or another, will look to find ways to do so. In some cases, it may be critical to the survival of the business. We can expect, therefore, more CVAs and, indeed, restructuring aimed at divesting onerous obligations. This is likely to lead to the adoption of potentially aggressive solutions, particularly when a business’s survival depends on it.
Aggressive restructures
This scenario is nothing new. For example, back in 2009, the global multimedia company Vivendi and its corporate directors were sued by liquidators appointed by the owners of a landmark building in West London, The Ark. It was alleged that Vivendi had engaged in a restructuring that resulted in a subsidiary that rented The Ark at a substantial rent being sold to new owners. The Ark lease transferred with the subsidiary, and so it was then off Vivendi’s books.
However, the new owners of The Ark lease did not pay the rent, leaving the landlords significantly out of pocket. Litigation was commenced in 2009. In that claim, it was alleged that the restructuring and disposal of The Ark lease amounted to breaches of duty by the corporate directors and left and left them and Vivendi liable to account for over £77m. This was because, before the restructuring, The Ark was occupied by a Vivendi entity with nearly £1bn in assets that was quite capable of meeting its rent obligations. The effect of the restructure left The Ark with a tenant with only £15m in assets and insufficient funds to pay rental sums due.
That claim was settled. However, litigation relating to this matter continued (see, for example, Vivendi SA v Richards [2013] EWHC 3006 (Ch) for further details).
Conclusion
We are heading into unchartered waters, with changes to the use of physical premises greatly accelerated by the pandemic.
Add to that the financial pressure on many businesses – perversely often those same businesses with significant real estate footprints – and it seems inevitable that many businesses may look to reduce excess space.
This will likely drive an increase in restructuring, as we already seen in some sectors. It will be a zero-sum game for some businesses, which will have to reduce space or face insolvency. This will drive more aggressive stances being taken, and inevitable disputes. The question is whether the landlords or the tenant companies will come out on top.
This article first appeared in Accountancy Daily on 20 April 2021. Click here to read the full article, subscription required.
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