22 Mar 2012

What the quarter day holds for retailers

As the first quarter-rent day for retailers approaches, Neil Smyth, restructuring and corporate recovery partner at law firm Taylor Wessing, considers the risk for a struggling sector

Tales of woe on the high street are well publicised, and the rest of 2012 is expected to remain difficult for retailers. After a year on year rise in retail sales in January 2012, which was partly fuelled by heavy discounting, sales in February fell.

Inflation is starting to fall, but fuel prices continue to rise and, at the same time, unemployment is on the increase and is expected to keep increasing as public sector cuts continue. As a result, saving remains a priority for individuals with the amount of unsecured personal debt falling for the 40th consecutive month in January.

Encouraging people to spend money on the high street is therefore getting harder, particularly with the increasing popularity of internet retailing. Retailers are reducing prices to attract customers, whilst at the same time facing increased costs, further squeezing profits.

This month sees the first quarter due date of 2012 (25 March) when the majority of rent becomes due for retailers on their various properties. Whilst the December quarter date falls at the most cash rich time for retailers, at the end of the Christmas period and prior to suppliers on terms being normally paid, the March quarter date falls after nearly three months of post Christmas trading.

This is usually the hardest period for a retailer, especially at a time where sales are decreasing.

The quarter date and the prospect of paying three months rent upfront, is always a date that has distressed retailers considering their futures. The pressure on the directors of a business in financial difficulty is personal liability, for failing to act in the best interest of creditors and/or not having a reasonable belief that the company can continue to trade.

If cash projections don’t match outgoings, like rent, then directors must focus on whether continued trading will actually improve the position for all creditors. There is often a secured creditor, who may stand to recover the most out of a distressed situation for a retailer. However, other creditors’ positions cannot be ignored and directors continue to trade with no clear idea of how the company will survive, at their peril, with the risk of personal liability and/or disqualification.

Quarter dates often focus the mind and hasten the insolvency process of a tenant. However, whilst retailers will be reviewing their positions in the run up to a quarter date, so will landlords. Landlords are most often unsecured creditors in a tenant’s insolvency and can lose substantial amounts, therefore landlords’ credit control is becoming tighter and tighter.

Prior to the end of 2009 and a change in the law through a court decision called Goldacre, administrators usually agreed to pay rent to landlords for the trading period of an administration as an “administration expense”, which meant such rent was usually paid in full, despite the tenant’s insolvency.

In Goldacre, it was held that administrators must pay rent as an administration expense in accordance with the terms of the lease. Therefore if rent is payable quarterly in advance, and an administrator is in occupation of a property on the quarter day, then rent must be paid as an expense for the full quarter, no matter how long the administrator is in occupation.

This decision was seen as a welcome victory for landlords in an otherwise difficult economy. They were now looking at a greater recovery of rent in an administration. However, administrators' response to that decision, as has been seen in retail administrations like TJ Hughes and Focus DIY last year, is to argue that if the administrator is not in occupation on the rental due date, no rent is payable for that rental period as an administration expense.

On Focus DIY, administrators were appointed at the start of May 2011 (after the March quarter date), but had vacated a number of premises before the June quarter day and then maintained that no rent was payable for the period of occupation. That position has not been tested in the courts and a number of test cases on the issue have settled.

As a result of this approach, landlords are not only experiencing more tenant insolvencies, but are also now looking at a reduction in the recovery of rent during an administration as tenants file a Notice of Intention to appoint administrators before a rental due date. This creates a moratorium preventing landlords from forfeiting the lease on non-payment of rent, but administrators are not appointed until after the rental due date.

Strategically, the administrators will then be looking to exit the premises by the next quarter date to avoid paying rent for the trading period, potentially saving substantial sums, particularly where there are numerous sites.

Retailers are not therefore looking just at the added pressure of making money in difficult times, but are subject to greater and greater pressure from their creditors, especially landlords.

This all combines to suggest that further retail insolvencies will follow as the March quarter date approaches and Fenn Wright Manson has become the first well known casualty in that regard.


Neil Smyth is restructuring and corporate partner at Taylor Wessing