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New Look is set for another clash with its landlords next week as it prepares to ask for further big cuts in rents with a warning that it could go bust without them.
The fashion retailer, which has almost 500 stores and employs more than 12,000 people, is proposing its second company voluntary arrangement in as many years as it contends with a hit to sales from coronavirus.
But property owners are aggrieved at the terms of its proposal — which they say goes well beyond the normal remit of the controversial insolvency process — and fear it will set an unwelcome precedent.
New Look wants to switch more than 400 stores to paying rent that is between 2 per cent and 12 per cent of turnover, compared with fixed monthly or quarterly charges, arguing this is the fairest way to share risk in an uncertain world.
One landlord said this represented “a fundamental change to lease arrangements, rather than temporary relief” from difficult trading conditions that CVAs are intended to provide.
Another asserted that New Look had worked out the rents it wanted to pay and set the turnover percentages to produce that result. “It’s clear we need to move to new models and in general we accept turnover rents,” he said. “But they have to be based on affordability, not guesswork”.
Melanie Leech, chief executive of the British Property Federation, which represents property owners, said this kind of structural change to retail leases must be “underpinned by transparency and fairness, not as part of an underhanded attempt to exploit a legislative loophole to simply get out of leases freely agreed and signed by both parties”.
New Look said its proposal offered landlords multiple opportunities to take stores back if they felt they could obtain a higher rent from another tenant.
Four-fifths of the stores in the CVA have a break clause coming up within three years and the company could close stores at the end of that period if sales have not recovered to 85 per cent of pre-coronavirus levels.
The company’s sales fell by more than 30 per cent in March, compared with a year earlier, and are down by 38 per cent on a same-store basis since they reopened after lockdown, according to CVA documents seen by the Financial Times. It has total debts of about 10 times last year’s underlying earnings.
Dozens of store closures are still possible, although New Look denies it plans to shut more. “We still fundamentally believe the physical store has a significant part to play in the overall retail market and our omnichannel strategy,” chief executive Nigel Oddy told landlords in a letter also seen by the FT.
The retailer shut 60 stores under its previous CVA and landlords took back a further 75.
Shop owners are also irked that New Look is not clearing arrears built up after it stopped paying rent and service charges at the start of the pandemic.
The company said it was “unable to clear the arrears as a result of the Covid-19 pandemic” although it was repaying service charges.
It pointed out that bondholders were set to vote in favour of a debt-for-equity swap that would wipe out £440m of bonds, barely a year after agreeing a restructuring of more than £1bn of debt, and junior lenders would rank below landlords in the recapitalised company.
“We have sought to ensure that our proposal offers our landlords flexibility and fairness, with consistent methodology applied across the portfolio,” the company said.
Landlords have more voting power than usual in this CVA because of the relatively small claims of other unsecured creditors, such as suppliers and the tax authorities. At least three-quarters of creditors by value must vote in favour for the CVA to proceed.
New Look has more than 300 landlords, many of which are small firms or individuals.
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