On May 15 2018 I wrote “Prepare to be wrong” – because when you make decisions you are going to base them on assumptions containing predictions about the future. Most likely, these predictions will be incorrect. You could be wrong in a positive way (“we underestimated demand for our marvellous new product”), or in a negative way (“we didn´t expect our supplier to be so late”) but you will, more often than not, be wrong. If you are lucky and/or have prepared wisely, the size of your error will be manageable. If not, disaster could loom. So what form could “preparing wisely” take?
I came back to this thought when reading an article about the use of Company Voluntary Arrangements (CVAs) to reduce rents, or even exit a rental contract altogether, on commercial property. CVAs are reasonably specific to UK law, and are designed to help companies which are in dire circumstances stay afloat when the only alternative is liquidation. The thrust of the article was that a number of landlords felt that tenants were using CVAs “unfairly” to relieve themselves of obligations they had happily signed up to when negotiating the original contract. Examples of companies using CVAs quoted in the article included Prezzo, New Look and Carpetright. I don´t expect that these companies, or their landlords, predicted CVAs when they originally negotiated their respective commercial property contracts. For the landlords, especially those with substantial business with these customers, the shock and impact of the CVA is great. They believed they had watertight long-term contracts, the result of tough previous negotiations. One landlord is quoted as saying “It just seems totally unfair. Prezzo fought hard for the 25 year lease and fought hard for the premises. I always thought a lease was a legal agreement, but in a few words they just said they were closing the shop and there was nothing we could do about it.” To the landlord the CVA feels like a hidden economic landmine which has now blown up a significant piece of their business.
Below the article, readers had made comments, and there seemed to be a theme, a theme that was a bit different in tone to that of the article. This was that the UK has had very “landlord friendly conditions for years and years”, and that landlords “had it coming” (the use of CVAs) due to the onerous conditions, such as upward-only rent reviews, that landlords had previously imposed in a market where demand exceeded supply. What everyone seemed to agree about though, was that things were changing fast. Traditional retail is being rapidly transformed by the switch to online, and the commercial property market itself by new providers like wework.com, who provide a similar service to traditional flexible office space providers like Regus, but are using a more dynamic, technology-oriented, “trendy” approach to disrupt the market.
Decision making theory suggests that part of preparing to be wrong is setting tripwires. These are like alarms that go off when a threshold is exceeded or a milestone is not met which tell us that the predictions assumed in our proposal are not coming true. The aim of the tripwire is to mitigate the human tendency to “double-down”: to work harder, invest more or somehow force our partners to meet their obligations, because once we commit we don´t like to admit we got it wrong. Tripwires help us to re-evaluate, and give us a chance to change direction, or even stop altogether.
In the case of UK high street commercial property, times are likely to get a little tougher, given market conditions. As well as wework style flexibility, smart landlords will probably start to use tripwires more. One example could be by using variable length contracts where either party has the right to exit/renegotiate if certain conditions are not met (perhaps volume measures like footfall, or unit sales). Successful landlords need their tenants to be successful too. I´m sure many landlords will feel like they are giving up hard fought protections and securities, but perhaps they should consider that it is better to stumble over a tripwire than be blown up by a landmine.