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Uncovering the Deterioration of the British High Street
The collapse of Thomas Cook was arguably the largest injury endured by the British High Street in 2019. The historically rich tour operator, founded in 1840, entered compulsory liquidation. Eleventh-hour talks failed to rescue the 178-year-old tourism pioneer. 150,000 holidaymakers were stranded overseas, 21,000 jobs lost worldwide and all 555 stores purchased by the rival, Hays Travel.
The demise of Thomas Cook was widely attributed to a problematic merger with a British travel group, My Travel. They had previously found themselves on the brink of failure. Traditionally dominated by market leaders such as Thomas Cook and TUI, new online-only rivals offering budget holidays entered the marketplace. Instantly becoming a threat to the market leaders’ survival.
TUI set out to establish their own identity to make them easily differentiable from competitors. Thomas Cook remained loyal to their brand history which was deteriorating in value.
Covid-19 uncertainty has increased competition and Brexit repercussions threaten the viability of High Street businesses. Failure to embrace business agility could result in an untenanted High Street. Company overheads, including rent payments, are falling short. High Street businesses are scrambling to raise funds after being hit by the crisis. Many are calling for landlords to review rent agreements in light of Covid-19 and the current challenging trading conditions. We will show you how a Company Voluntary Arrangement can benefit both the landlord and the tenant.
How can a Company Voluntary Arrangement Save Retailers?
A Company Voluntary Arrangement (CVA) is a practical debt management tool which can help tackle the root of debt problems for commercial tenants. This formal insolvency procedure consists of entering negotiations with creditors, including landlords, to propose reduced payments. In reality, this would typically represent the best chance for the landlord to receive rent payments, albeit a fraction. If creditors refuse to agree to the CVA proposal, the business may likely turn to company liquidation. This could result in an even smaller payment for the landlord.
The order in which creditors are paid during a company liquidation is set out by the Insolvency Act, 1986. Here is a list defining which party gets paid during the liquidation procedure:
- Secured creditors holding a fixed charge
- Preferential creditors
- Secured creditors with a floating charge, and the ‘prescribed part’
- Unsecured creditors
- Associate unsecured creditors
Rental payments are classed as unsecured debts during the liquidation procedure. This means that by the time unsecured creditors are due to be paid, it is highly likely that the company will be out of cash to the detriment of landlords.
Turning the Cheek to Deteriorating Business Health
On the list of common debts encountered by businesses, rent and commercial lease payments typically share the same position as:
- HMRC tax payments
- loan repayments
- employee wages
- overdraft charges.
If company cash flow is limited, businesses are likely to fall short of funds to fulfil commercial lease payments, making entering a restructuring solution in your best interests.
Turning to a Company Voluntary Arrangement can help businesses arrive at a mutual understanding with creditors, legally binding your commercial tenant to make repayments under insolvency law. A Fast-Track CVA is a compressed CVA which can be performed in a shorter time period. This is suitable for situations when business survival is a fight against time, such as during the coronavirus pandemic.
Businesses are experiencing long-term financial distress, hindering company growth and progress. Restructuring outgoings could preserve company value and ease cash flow. If company owners feed each spare pound to repay creditors, this could have a reverse effect on the health of the business, such as:
Inability to finance high-value contracts – If companies are unable to fund larger projects, this could result in losing out on opportunities to earn recurring income. Securing customer loyalty and long-term contracts can help earn a consistent income and predict profits. By unlocking funds to reinvest in the company, business owners can purchase additional stock and tender for higher-value jobs, earning the position of preferred supplier.
Staple brand identity – By easing cash flow, businesses can make the investment they require to establish the brand name. This is essential for High Street businesses to stand against new competition. Part of the brand discovery process may include conducting extensive brand advertising or improving the customer experience to make it more immersive, from the packaging, communications platforms and customer support capacity.
Stimulating company growth – Attracting different consumers groups and branching out into additional markets can help increase brand attraction and raise conversion rates, therefore promoting company growth. Company growth can be stimulated by forming a connection with customers through brand identity, innovative marketing strategies and by providing a unique service. By sourcing new ways to drive income and tapping into new areas of brand promotion, businesses can protect their position on the High Street and reduce financial risk for the landlord.
The coronavirus pandemic battles its way through each industry, leaving no business untouched. Operating in an agile manner and protecting your financial position is instrumental to business survival. More retail businesses are exploring company restructuring solutions, including a Company Voluntary Arrangement. The onus lies on the landlord to either cooperate or juggle the chances of obtaining bad debt.
Keith Tully is a partner at Real Business Rescue and a licensed insolvency practitioner specialising in providing business recovery support to company directors in financial distress. He advises business owners on company liquidation and restructuring solutions, such as Company Voluntary Arrangements, Company Administration and accessing funding solutions.
