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In the event of liquidation, what are some of the challenges specific to retail in terms of asset di

September 2019 - Insolvency & Restructuring. Legal Developments by IR Global.

More articles by this firm.

The following article discusses session three in the IR Global Virtual Series on 'The Retail Apocalypse'

Australia – JC Upon liquidation, there is very little for creditors, because most stock is secured by general securities, helped by suppliers or financiers. There is little, if any, value in taking over premises. Even then, landlords will need to provide consent and that will not be forthcoming.

There are also many other complex issues including gift cards and security disputes. These problems, encountered with little or no return in the liquidation space, drive sale or reorganisation, provided those options are available.

U.S, Illinois – RF When large retailers go out of business and hundreds of lease locations become available simultaneously, it creates a glut of real estate that exceeds the market’s ability to absorb it.

With Toys R US, there were owned stores that were subject to mortgages and were being sold to end users or financial buyers. The banks that held the mortgages on everything had to make a decision on a store-by-store basis about whether they should hold the store for a while, hoping the market price rebounds, or sell, take the cash and run.

In the specific part of the Toys R US case that I was involved with, there were at least a hundred and twenty-five stores in the sale. Only about 15-20 of the locations were sold to third parties and ended up taking the rest of the properties themselves to manage and sell over time at the lender's leisure.

That was going on simultaneously with about 600 leased stores being given back to the landlords. This created an unbelievable amount of available real estate in US malls around the country, with not enough users who wanted to pay that kind of retail lease price for property.

Many of these spaces are now being used in completely different ways than they were ever used before, at rents that are much lower than what those landlords were able to extract in a traditional retail market. The leases present a particularly complex problem for the parties that are trying to realise value from them.

Canada – FS I'm working on a matter right now, which is typical from a landlord’s perspective.

We're acting for a law firm here in Canada that is going into disillusion. The offices look just like any typical law firm offices look like here in Canada, where the lawyers all have typical offices with windows and the staff work on the interior of the office.

It’s a big space, but the landlord cannot re-lease it to another law firm because nobody wants space that looks like an old law firm anymore. It is proving very hard to get value out of leased premises without taking it back to base building and recreating new premises that look totally different.

England – DF A lot of the companies in the UK have got space that first came onto the market in the 1960s and 1970s. Fundamentally, they are fairly ugly functional buildings that it is hard to do too much with.

Auctions have a role sometimes, but you've got to be careful about knowing you’re getting the true value from a sale.

Managing the portfolio is obviously key. We have many large retail firms that are looking very hard at what leases are coming to an end and how they can divest themselves as quickly as possible of that part of their portfolio.

Larger landlords such as Intu have certainly pushed back against a lot of reductions coming from company voluntary arrangements, regarding them as unfair and possibly damaging in the future.

Belgium – PT The problem with retail bankruptcies is that, as a receiver, it’s very difficult to get value out of it these days.

Seven or eight years ago, when retail companies went bankrupt, other competitors on the market were seeking to take over the lease, because of the good location. They were willing to pay significant amount for the possibility of taking over the lease.

Today, we get zero euros for taking over leases and we get really poor results on the sale of the assets of retail companies. This is a trend that we are seeing across Belgium.

France – YMR Judicial liquidation in France is the final step when recovery is clearly impossible. Asset disposal is a very important issue as retailers usually hold a large amount of stock.

Either the sale of the company is possible and the buyer must take over a substantial part of the stock, or a sale of individual assets is set up by mutual agreement or by auction.

The main aim is to sell stock for a fair price, often lower that outlets prices, in order to compensate for the damage suffered by employees. That is the case with the liquidation of Sonia Rykiel.

CONTRIBUTORS

Philippe Termote (PT) LIGE ADVOCATEN – Belgium www.irglobal.com/advisor/philippe-termote

Yves-Marie Ravet (YMR) Ravet & Associés – France www.irglobal.com/advisor/yves-marie-ravet

Robert M. Fishman (RF) Fox Rothschild LLP –U.S, Illinois www.irglobal.com/advisor/robert-m-fishman

S. Fay Sulley (FS) Torkin Manes LLP – Canada East www.irglobal.com/advisor/s-fay-sulley

James Conomos (JC) James Conomos Lawyers – Australia www.irglobal.com/advisor/james-conomos

David Foster (DF) Barlow Robbins – England www.irglobal.com/advisor/david-foster