Debenhams’ company voluntary arrangement (CVA) will heavily impact the public purse as “tightly stretched” local authorities across the UK will lose out on millions of pounds in business rates, real estate firm Colliers International has warned.
The CVA, which gained creditor approval on Thursday, will eventually lead to the closure of one-third of the chain’s 166 UK stores, which will allow it to continue trading. The retailer plans to close 22 stores by early 2020.
In its proposal, Debenhams categorised its properties under five headings. It plans to reduce its rates bill in categories 4 and 5 by around 50% in the current billing year, backdated to 9 May.
“Category 4” properties have been labelled as “materially underperforming”, while “Category 5” refers to “smaller, weaker tertiary retail centres”.
Colliers has estimated that this will affect 59 local authorities across the UK, which will lose out on £8.5m of the £17.3m business rates bills Debenhams should have been paying on the properties in these categories during the billing year.
Newcastle upon Tyne’s local authority will be hit hardest by the rates reductions, as this year it will lose £543,000 of an expected £1.2m.
Guildford will lose £446,070 from the £811,440 it was expecting, while Hammersmith and Fulham (the local authority for Westfield London in White City) will lose more than £715,000 of the £1.54 million it should have received in the same period.
John Webber, head of business rates at Colliers, said: “This news is yet another twist in the long and tortuous year of CVAs. Debenhams claims its new arrangements will offer a better return for the rating authority than going into administration, where after a short trading period the premises would be closed and no business rates would be paid under the exemption for empty properties. And to some extent they are right – stores are kept open, jobs are saved and at least some business rates are paid to fund public services.
“But, leaving aside the irony that it is the iniquitous business rates system that has been one of the major reasons for this mess in the first place, this move by Debenhams has far-reaching implications.
“In the long run, if by using a CVA a retailer is let off the hook of some of its business rates liabilities and this practice is followed by other struggling retailers, we will see the public purse massively compromised. Local authorities will not have the funds they have budgeted for to run local services, which we already know are tightly stretched.
“And on the business side we may see the emergence of a two-tier high street with those stores who have been run efficiently and have embraced the changing retail market place paying much higher rents and rates, than those like Debenhams who have not followed such a prudent path. The well run will be subsidising the poorly run.”
He added: “Looking at Westfield, for example, one might question the ethics of the rate payers of Hammersmith and Fulham subsidising the Debenhams store in such a prestigious location.
“It has been well documented that these CVAs have led to grumbling creditor landlords, not happy that that their rents are being reduced. But this takes the problem one step further as the man in the street is now adversely affected too.
“Not an ideal scenario for the UK high street going forward. It will be interesting to see how long such a scenario can in actual fact last.”
However, Terry Duddy, executive chairman of Debenhams, said that the CVA was vital for the department store chain to deliver a turnaround: “We will continue to work to preserve as many stores and jobs as possible through this process. This is a further important step to give us the platform to deliver a turnaround.”