The Little Trick In The Body Shop Bankruptcy

Something called the upwards only rent review

Yes, yes, of course we know, private equity is evil. They take over business only to bankrupt it, make their fortune and run away cackling. To do this to someone as beloved to the idiot left as Body Shop is a gross crime for which the capitalists will be first up against the wall when the revolution finally comes (howzabout that as a Guardian pitch, eh?).

That this suffers rather more than a lot from the Underpants Gnome problem - where’s the profit in driving bankrupt something you’ve just paid real cash to buy? - means this isn’t, in fact, what the Body Shop bankruptcy is about. What Body Shop is about is fucking over the landlords. As we’re all in favour of that this is all entirely different, of course.

The specific point is something that has become common to near universal in commercial property leases in the decades since the War. This is that rents can only ever be revised upwards.

So, the standard thing about commercial property is that it’s not so much rented as leased. The difference is not wholly clear but, roughly enough, you can leave a rental and you can’t leave a lease. That is, if you’ve a 21 year lease and you want to leave before the 21 years are up then it’s up to you to find another tenant. Not the landlord - and if that tenant that you do find then leaves/goes bust/doesn’t pay the rent then you have to. At least a rental you can leave.

OK - but that’s all pretty standard. The UK has one more thing. Obviously, there are rent reviews during the period of the lease. Inflation taught landlords that this was something they needed to do after all. OK - but the standard, and it really is standard in UK commercial leases, rent review is upwards only. Now, for most of this past 70 years this hasn’t been a problem. The country has been getting richer, inflation has persisted, retail’s been ever more of the economy, rents have been going up.

Ah, but now, eh? Firstly, we’ve the internet eating retail.

About, and roughly, 1% of the total market each year moves online. We all thought that the lockdown boom was going to persist and it didn’t. This caused all sorts of problems for all sorts of people - Boohoo ended up terribly overstocked. Made.com was able to come to market and then went bust as the right hand end of that chart happened and we returned to trend after the blip. Revolution Beauty had its own problems but the over valuation was at least partly to do with this and so on.

But this had already been happening - Intu went bust well before the pandemic, as we know. It’s now about true that 15% or more of UK retail space is empty. Because sales are moving online. This - naturally enough - means that prices, rents, of retail are falling. Well, OK.

But now this meets upwards only rent reviews. If you’re a new retailer looking for space then the High Streets are your mollusc of choice. You can probably get in on low rents, substantial rent free periods and even get the landlord to pay your fitting out costs (landlords would much rather give rent free periods, pay costs of moving in, than let at low rents. Because the terms of their own mortgages and loans make it better for them to keep headline rents stable whatever the hell the truth of the real value is). But if you’re a long established retailer paying high street rents then you’re screwed.

Your new competition might be able to get in by paying half the rent you are. And yes, rent is a really, really, big part of retail in the UK. You are, in fact, fucked and right royally.

Now, these are all big boys and big boys don’t cry when they’re screwed. But private equity can manoeuvre a way out of this. Go bankrupt.

Now, if you’re the standard stock market listed retailer this doesn't work very well. Going bust, by definition, wipes out your owners, the shareholders. The same is true of the standard privately owned company. You go bust, shareholders lose everything, the business, such as is left, gets sold to benefit the creditors. The largest creditors also get to be the determinants of the deal for selling those assets.

Ah, but this then gives space for private equity to have a go. So, the standard here is that private equity picks up the, well, equity. But then it also loads the business with debt. Well, we know that, right, the bastards drove Thames Water down the tubes doing that and….

Ah, but. Private equity now owns both the equity and also is the largest creditor. Which means that bankruptcy now becomes a viable tactic. You can afford to lose the equity in bankruptcy if you also control who gets to buy the business out of bankruptcy. Further, you’re the largest creditor, so you will probably be able to buy it for the outstanding debt it owes you. You’re not going to put an extra shilling in but you’ll cut the debt bill and you’ll own the business again.

Well, yes, sorta, because while capitalism is indeed wicked and vile it’s not quite that bad. Bankrupting a business that’s not actually bankrupt is rather frowned on. To the point that doing it excessively badly could well end in jail time.

Ahh, but what have we said above? Rent’s a major part of a retailer’s cost base. Under the standard British lease you can’t get your rent bill down - even if market rents are dropping like a stone (for new leases they are too). But, but, if you go bust then you can break your leases. Break, not have to pass on or be responsible for.

And, of course, what you do is tell that landlord staring at a 15% empty rate well, you know, we’ll stay in the shop we’re in but, umm, a 50% reduction in rent suit you? 75%? Maaate?

Administrators running The Body Shop are expected to demand rent cuts from its landlords as they race to secure a future for the collapsed business.

At which point we have that viable tactic. Buy up the struggling retailer staring at long leases on high rents. For peanuts in actual equity. Make sure you’re also the largest creditor. Then go bust and shaft the landlords. Coming out of bankruptcy/administration you’ve now a brand with shops, a vastly lower rent bill and you’ve probably cut the debt burden too. Happy Days. Be easier if the landlords would accept cuts in rent first but there we are, they won’t (because if one does then the others don’t have to, or have less reason to, ‘coz the business is now richer by that first rent cut by the first landlord, see?).

If you’re as realistic as I am then the whole point of the bankruptcy is to be able to make that demand. And get it fulfilled too.

We all do weep bitter tears at landlords getting theirs, don’t we? Yes, yes, we do….