2018 was dubbed the year of the CVA, allowing firms battling the structural changes taking place across Britain’s embattled high streets to not only close unprofitable stores hit by increasing cost pressures but to also seek rent reductions, often between 20% and 75%.
With that trend set to intensify over the coming months with Debenhams and Arcadia both reportedly set to use the controversial procedure, what are the implications of rent reductions upon business rates liabilities?
New rateable values for the next revaluation, which will come into effect on April 1, 2021 and will determine business rates liabilities until March 31, 2024, will be based upon an estimate by the Valuation Office Agency (VOA) of the open market rental value of properties on April 1, 2019, the antecedent valuation date (AVD).
Reduced rents under a CVA or other forms of insolvency restructuring as well as lease renewals only become a material consideration, in terms of business rates liabilities, at the AVD.
However, If rents were in decline before the AVD, then the continuing decline in values after April 1 could well be used to support a reduced rent subsequently agreed.
The true value on a set date can only be informed by looking at matters generally happening in the market around that date. AVD evidence will play a crucial part in this general assessment of the state of the market to the extent that it is likely to be used to support and demonstrate a pattern or trend in rents.
The reduced rent agreed under a CVA, while relevant at the AVD, might not necessarily, however, set the rateable value as it depends on whether it is a genuine reset of the rent to an open market value or is the best deal one side can do in the circumstances.
“In a CVA there are only two parties and one will have more ‘power’ than the other and so the rent could be above or below market value”
Unlike an open market deal such as a new letting, in a CVA there are only two parties and one will have more “power” than the other and so the rent could be above or below market value.
A turnover rent, for example, which has become increasingly popular for retailers seeking to reduce rental liabilities, would only be looked at in the absence of anything else – there will usually be some straight open market transactions to analyse such as the clean deal next door, likely to be seen by the VOA as a better indicator than the turnover rent on the subject property.
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