What next for landlords in battle with Travelodge?

The dispute between Travelodge and its landlords took another turn this week with the budget hotel operator threatening to pursue a company voluntary arrangement (CVA) if rent cuts of up to 80% for 18 months was not agreed.

In a letter sent to landlords, Travelodge said it had already lost the equivalent of several months of revenue as a result of the lockdown and with any recovery likely to be slow, it states it could lose more than £350m in revenue for the year.

Travelodge, owned by Goldman Sachs and New York hedge funds Avenue Capital and GoldenTree Asset Management, has asked landlords for rents to be slashed by between 25% and 80% at its most exposed locations.

If it does not secure adequate agreement for its proposal it said it would pursue a CVA. But what does this mean for landlords?

The use of CVA’s has become very controversial in the property world, most notably in the retail sector over the past few years. It is a form of insolvency that allows struggling companies to cancel leases and/or reduce rents. However, it has been increasingly exploited by healthy companies to shut unwanted stores and slash their rent liabilities.

CVA proposals must get the approval of 75% of the creditors to be implemented. However, landlords have little say in the creditor vote as it is the value of debt owed to the creditor which determines the voting power. Whilst ascertained arrears are given actual value, unascertained sums (future rent) carry a value of £1 for voting purposes.

In order to avoid a CVA in this instance, landlords have been told they must accept rent cuts until December 2021 amounting to between £103m to £146m in total rent.

This proposal has been widely rejected by landlords.

A number have offered alternative proposals to Travelodge that would allow the hotel operator to defer its March rent bill and 20 per cent each month for the rest of 2020 — amounting to around £73m. If Travelodge obeys its lease terms for the next two years, the landlords have agreed to write off the deferred rent at the end of 2021.

Travelodge’s standoffish approach during a time when almost every business is suffering and the fact that its backers had contributed only debt, which they are charging interest on, has been particularly irksome for landlords.

Secure Income REIT, Travelodge’s biggest landlord, said the proposal was “not in keeping with either the nature or the spirit of the proposals made by any of our other tenants who all engaged with us constructively”.

Another investment manager that has a small exposure to Travelodge told QuotedData that the hotel’s owners had gone on the charm offensive after a previous CVA in 2012, telling landlords that its business was in a solid position, had a strong balance sheet and backers with deep pockets.

Whilst landlords are pushing hard to come to an amicable solution with Travelodge, with concessions such as lease extensions on the table, they will just have to suck it up if a CVA is pursued. There are many things wrong with the CVA process, but the fact that landlords have little sway in its outcome is nothing short of scandalous. Until legislative change comes from central government, businesses will continue to exploit the CVA, at a significant cost to landlords.