CVAs rocket by 143 per cent as restaurant sector struggles

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The number of restaurants in financial distress has rocketed by 143 per cent in the last six months as more struggling businesses turn to the Company Voluntary Arrangement (CVA) to curtail losses.

Data by magic circle firm Linklaters shows that over that period there were 12 CVAs, which allow a company to restructure its estate, compared with 17 over the whole of 2017.

Notable recent examples of restaurants triggering the CVA include Jamie Oliver’s Barbecoa restaurants, Byron, Carluccio’s and Prezzo.

Linklaters restructuring and insolvency partner Richard Hodgson said the restaurant sector was suffering from a “stranglehold” caused by a number of factors including the oversaturation of the market.

First, there’s oversaturation in the market,” he said. “A number of chains expanded rapidly to the point that supply has raced ahead of demand. Couple that with increased food prices, staff costs and business rates, owners are looking at where they can reduce costs to put the business on a more sustainable footing.”

CVAs have not only rocked the restaurant sector, with a number of retail outlets also turning to them to help see off financial distress.

CVAs were up 42 per cent over the last six months compared with the previous six months. Toys R Us, Carpetright, Mothercare and House of Fraser have all launched CVAs in recent weeks.

The increasing use of CVAs is proving to have a detrimental effect on property companies and landlords, with figures from the Centre for Retail Research showing that 23 retailers failed this year, affecting 1,851 stores, a 33 per cent increase compared with the whole of last year.

The phenomenon prompted the British Property Federation (BPF) to last month call on the government to review the CVA system. Ian Fletcher, BPF’s director of real estate policy, said some CVAs were seen by landlords as “simply lease-stripping exercises”.

Linklaters real estate partner Simon Price said: “When used successfully, CVAs can lead to businesses being saved and therefore fewer property vacancies. However, their use has become much more wide-spread and is therefore having a more significant impact on landlords than was maybe originally conceived. As a result, we have seen some resistance and pressure from a number of landlords this year, calling for the government to reform the system.”

He added: “The number of recent occupier defaults is part of a wider set of challenges facing investors in high street retail at present and we are seeing an increasing number of investors looking to reduce the overall retail floor space by focussing on an increased mix of uses such as leisure, while looking for opportunities to carry out residential development on available land in town centres.”