Measure the compromise against what the unit would earn if you took it back, then against the rent the tenant's own sales can carry.
Price the CVA twice: against the lease, and against taking the unit back. On an illustrative shop let at 120,000 with six years to run, a 40 per cent cut to 72,000 costs 221,898 of present value against the contract, but terminating and re-letting would cost 355,507, so the compromise is the better outcome by 133,609. The tenant's own sales support 90,000, a 25 per cent cut, and that is the number to negotiate from.
Worked in full in Retail Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A company voluntary arrangement, the UK procedure through which a struggling retailer asks its creditors to accept reduced rents, arrives with a deadline and a schedule of compromised leases. The landlord has a vote and usually a right to terminate the lease instead. Both choices are cash flows, and only one of them looks bad on the rent roll.
| Input | Value |
|---|---|
| Passing rent, a year | 120,000 |
| Unexpired term | 6 years |
| CVA proposal: rent cut for the rest of the term | 40% |
| Tenant's sales, ex VAT | 1,100,000 |
| Occupancy cost ceiling for the trade | 12% |
| Service charge and rates | 15,000 + 27,000 |
| If taken back: void, then rent-free on a new lease | 12 + 6 months |
| Void costs (rates, service charge, insurance), a year | 50,000 |
| Landlord's works / letting fee on the new rent | 40,000 / 15% |
| Discount rate | 8% |
All figures are illustrative and the procedure's legal mechanics vary; this is the economics only. Rent is taken annually in arrears to keep the arithmetic visible.
Retail is the only asset class where the tenant reports its sales, and the CVA is the moment to use them. The sustainable rent is the ceiling times sales, less the other occupancy costs:
Sustainable rent = 12% × 1,100,000 − 15,000 − 27,000 = 132,000 − 42,000 = 90,000
Occupancy cost ratio at the passing rent = (120,000 + 42,000) / 1,100,000 = 14.73%
The unit is over-rented by 30,000. Any new tenant in the same trade would pay about 90,000, so that is also the re-letting rent.
| Option | Year 1 | Year 2 | Years 3 to 6 | PV at 8% |
|---|---|---|---|---|
| Lease as signed | 120,000 | 120,000 | 120,000 | 554,746 |
| Accept the CVA | 72,000 | 72,000 | 72,000 | 332,847 |
| Terminate and re-let | -90,000 | 31,500 | 90,000 | 199,238 |
The re-letting line carries 50,000 of void costs and 40,000 of works in year one; in year two, six months of rent-free leave 45,000 of rent, less a 13,500 letting fee. In Excel each line is =NPV(8%,B2:G2), and the annuity factor for the two flat lines is 4.62.
Cost of the CVA against the lease = 554,746 − 332,847 = 221,898, 40.0 per cent
Cost of terminating = 554,746 − 199,238 = 355,507, 64.1 per cent
Advantage of the CVA = 133,609
After year six both units are assumed let at 90,000. The re-let unit would by then have a longer lease, which a valuer would credit; the CVA unit faces its own expiry. Both effects are left out so the comparison stays on the remaining term.
The CVA beats re-letting as long as its present value exceeds 199,238. That is a rent of 43,098, a cut of 64.1 per cent: the same percentage as the cost of terminating, because a permanent cut scales the whole contract.
| Cut | CVA rent | PV | Cost against lease | Better than re-letting by |
|---|---|---|---|---|
| 20% | 96,000 | 443,796 | 110,949 | 244,558 |
| 30% | 84,000 | 388,322 | 166,424 | 189,084 |
| 40% | 72,000 | 332,847 | 221,898 | 133,609 |
| 50% | 60,000 | 277,373 | 277,373 | 78,135 |
| 60% | 48,000 | 221,898 | 332,847 | 22,660 |
The void matters as much as the cut. A six-month void narrows the CVA's advantage to 72,807; an 18-month void widens it to 193,623, and 24 months to 249,921. In a centre with other empty units, the long void is the realistic one.
The 221,898 is the headline every report will print, and it measures the CVA against a rent of 120,000 that the tenant's sales could not carry. Against the 90,000 the sales do support, worth 416,059 over the term, the real concession is the 18,000 a year between 90,000 and 72,000, 83,212 of present value. That is the amount worth fighting for, and the sales report is the evidence. The opposite error is to reject the CVA on principle and take back a unit that costs 90,000 in its first year empty.
A turnover-only rent is often the better counter-offer: at 8 per cent of 1,100,000 it pays 88,000, close to the sustainable rent, and it recovers with the tenant's sales. See how turnover rent is calculated.
The book's tape sheet computes the sustainable rent unit by unit and sets restructuring bands against it; the free workbook for this case runs it on your own centre. The ratio behind the ceiling is set out in how to calculate a retailer's occupancy cost ratio.
Compare the present value of the compromised rent with the present value of taking the unit back, after void costs, works, rent-free and fees. On an illustrative shop the CVA rent of 72,000 is worth 332,847 over six years at 8 per cent and re-letting is worth 199,238, so the CVA is the better outcome by 133,609 unless the cut exceeds 64.1 per cent.
The cut that brings the rent down to what the tenant's own sales can carry. With sales of 1,100,000, a 12 per cent occupancy cost ceiling, 15,000 of service charge and 27,000 of rates, the shop supports 90,000, a 25 per cent cut. A 40 per cent cut to 72,000 gives away 18,000 a year more than the sales justify, 83,212 of present value.
It can be, because it moves with the tenant's recovery. At 8 per cent of sales of 1,100,000, a turnover-only rent is 88,000, close to the 90,000 the sales support and well above a 72,000 fixed rent. The landlord takes the downside of weaker sales but keeps the upside, which a fixed cut gives away.
This article is one calculation from Retail Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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