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Decline in the Retail Sector: an Insolvency Perspective

Background: Financial Backdrop

The Stats

Last year was the worst on record for British retail, with sales falling for the first time in 24 years. Total sales slipped by 0.1% in 2019, according to the British Retail Consortium (BRC) and advisory firm KPMG, the lowest since they began monitoring the sector in 1995. The downturn was influenced by a 0.9% fall in sales in the crucial final two months of the year when many retailers get most of their annual profits. That decline was partly driven by online sales rising by 2.6% in November and December.


December figures from Barclaycard indicated a move away from buying goods towards spending on experiences. The data, published on Thursday, indicated a 19% rise in cinema ticket sales, 11.7% increase in spending in pubs and 12.5% jump in takeaway orders, while spending on clothing, toys and computer games contracted. 



With many countries around the world still in lockdown due to the coronavirus pandemic, the knock-on effect on retailers and their suppliers is unprecedented. It is reported in the Guardian that there is an estimated £10bn of clothing pile ups in warehouses. Major retailers such as Primark, Arcadia and have all stopped taking deliveries as their warehouses are full. Whilst many brands have continued to trade online, some have been forced to close these operations because of the difficulties they face protecting their workers from infection; Debenhams filed for administration shortly after the lockdown in the UK began. Could COVID-19 spell the end of the high street as we know it? 


This article considers the impact of the decline in the retail sector on the tenant/landlord/lender relationship and discusses some of the potential options available to lenders who are considering an exit strategy from a non-performing retail asset.


The Domino Effect: Tenant – Landlord – Lender

Prior to the recent COVID-19 pandemic, some retailers were carrying significant financial burdens, with heavy commercial rents and wages representing a significant proportion of retailers' expenditure. This caused various distressed retailers (or their lenders) to call in administrators or propose company voluntary arrangements (“CVA”). 


Before the Coronavirus Act 2020 (the Government’s response to the COVID-19 pandemic), if a retail tenant breached certain lease terms, the retail landlord would have a number of enforcement options to choose from, including (but not limited to): 

  • Forfeiture
  • exercising the Commercial Rent Arrears Recovery (“CRAR”) enforcement procedure under the Tribunals, Courts and Enforcement Act 2007
  • issuing a money claim  to recover a debt (i.e. rent)
  • if the landlord considers the tenant/retailer to be insolvent (i.e. unable to pay its debts as they fall due pursuant to section 123 of the Insolvency Act 1986), they may serve a statutory demand for outstanding rent, service charges etc.. If the debt remains unpaid for three weeks, the landlord may proceed to petition to wind up the retail tenant 


The Coronavirus Act 2020 has limited those options: the Government has prohibited forfeiture of commercial leases for non-payment of rent (at least until end of June) to protect struggling retail tenants during the pandemic. Further, the Government have now issued new measures to protect High street retailers and other companies under strain from what could be deemed as aggressive rent collection and retailers will be asked to pay what they can during the coronavirus pandemic. The Government will temporarily ban the use of statutory demands and winding up orders as a debt collection tool where a company cannot pay their rent due to coronavirus. The measures will be included in the Corporate Insolvency and Governance Bill, which the Business Secretary Alok Sharma set out earlier in April 2020. The Government is also laying secondary legislation to provide tenants with more breathing space to pay rent by preventing landlords using Commercial Rent Arrears Recovery (CRAR) unless they are owed 90 days of unpaid rent. 


As more retailers appear to be entering into insolvency processes, the obvious knock-on effect is that retail landlords may find themselves in financial difficulties i.e. landlords may struggle to make loan repayments payments due under a loan facility secured against the retail premises, potentially leading to defaults. In addition, many leveraged retail assets have already suffered declines in valuations, which could themselves breach loan to value covenants. In this scenario, the lender will want to review the terms of its security.


Pre-enforcement considerations 

Before making any decision on enforcement, a lender may first want to explore less adversarial options / steps – one or several of such options / steps may in fact result in a better outcome. The table below summarises some of the options / steps a lender may want to consider in the first instance:


Consider any viable alternative to enforcement action: i.e. a consensual restructuring of the debt or voluntary programme of disposals to reduce the debt or a time-to-pay arrangement.
Instruct an advisor to conduct a security review:

The advisor will check (amongst other things) whether:

(1)    the security is valid and comprehensive in scope so a remedy of choice can be exercised;

(2)    any action needs to be taken to improve the security; and

(3)    the security will fall foul of the Insolvency Act 1986 rendering it unenforceable.

Keep in mind the landlord’s other creditors: i.e. any inter-creditor agreements/deeds of priority entered into.
How to demand under the security and financial position of the guarantor Check security agreement and follow the terms to ensure any demand is served correctly.
Costs of enforcement: Would enforcement maximise recovery? What claims would rank in priority to the security holder?


Options for lender to enforce security over retail premises as at 15 April 2020 (during COVID-19 pandemic)

There are various enforcement options that may be available to lenders. This will depend on type of security interests and the nature of the secured asset. Set out below are several generic enforcement options that may be available to a lender, however, it is always sensible for lenders to obtain specific advice on their security agreement and the options available. 


  Power to appoint a receiver Insolvency proceedings against the landlord: Power of possession and sale
Corporate landlord (Company

The holder of a fixed charge may appoint a receiver over the secured asset.

The receiver will manage the secured asset, realise it (usually by a sale to a third party purchaser) and distribute the proceeds (less fees and expenses) to the appointing lender.

The benefit to a lender of appointing a receiver is that they act in the interests of the lender; they do not need to consider the interests of the landlord’s other creditors.

1. Power to appoint an administrator

The holder of a qualifying floating charge may appoint an administrator over the landlord.


Administration permits a reorganisation of a landlord company's affairs and/or the realisation of its assets for the benefit of creditors. The administrator takes over the control of the landlord’s affairs from its directors. When a company enters administration, it becomes subject to a 12 month statutory moratorium that prevents creditors enforcing claims / rights against the company. 

A disadvantage to a lender who appoints an administrator (rather than a receiver) is that it does not have the power to direct the actions of the administrator. An administrator, as an agent of the landlord, and as an officer of the court, must carry out its functions in the interests of the creditors as a whole. 

2. Winding up petition

Currently, the court is permitting winding up petitions to be presented and hearings are taking place remotely by Skype and telephone. (Note that the government has introduced restrictions on commercial landlords presenting winding up petitions against tenants who cannot pay due to COVID19 – this does not currently affect the lender’s ability to wind up a landlord if applicable.)

A lender may wish to sell the secured assets and use the proceeds to pay off the secured liabilities. If the lender is a mortgagee pursuant to section 101 LPA 1925, the lender has a statutory power of sale. 

However, due to the coronavirus outbreak and the new CPR Practice Direction 51Z, possession proceedings under Part 55 CPR are prohibited until 30 June 2020 (subject to further extension), save for injunctive claims where there is a clear risk to life or property, or of public disorder. Very clear supporting evidence will be required to support an injunction. The FCA published guidance for mortgage lenders on their treatment of customers in the light of coronavirus disease (COVID-19) pandemic. Many banks and building societies are now offering repayment holidays as a way of dealing with breaches to the security agreement.

Corporate landlord (private individual)

As above.

1. Statutory demand

Permitted at present. Could be subject to change pending further announcements from the Government.

As above.


Given the unprecedented nature of the current economic climate, and the constantly evolving guidelines and legislation designed by the Government to tackle the impact of the pandemic, it is prudent for lenders to seek legal advice as soon as they see the early warning signs of distress; it is often the case that options become more limited and/or more complex as time passes.


So what will the future hold for retail and the high street?

It is possible that the Coronavirus pandemic will expedite the changing nature of ‘traditional high street’ retailers, pushing even more consumers online. This may in turn lead to greater repurposing of retail assets to mixed use developments focused on consumer experiences in the future. 

For more information, please contact  Hannah Edwards, or a member of our Insolvency team to discuss any queries whether from a tenant, landlord or lender perspective.

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