I reported a few days ago that Clinton Cards was facing being placed into administration. Well the retailer’s fate was just sealed and the company is now officially in the hands of Zolfo Cooper. What does this now mean to those commercial property owners with shops occupied by Clinton Cards and Birthdays?

If a buyer is found, then they will surely decide to close down a large number of Clinton’s non-performing stores. That doesn’t mean that those people with properties that Clintons’ wish to stay in will be unaffected. Once the new owners decide which stores should remain, they will contact the store owners and seek to reduce the rent. Faced with owning a vacant property, which in this market could take over a year to re-let, and the prospect of having to pay empty rates, in addition to continuing with interest payments on loans, most landlords will have no choice other than to agree to Clinton’s demands. However, those people who are told that Clintons’ no longer wish to trade from their units face even bigger problems. Their income will disappear over-night and they will be left owning a vacant retail property which they will have to re-let.

The end result of either of the above scenarios will be that all the properties occupied by Clintons’ just before the administration will fall in value leaving landlords out-of-pocket and some facing bankruptcy. In a large percentage of cases, where the owners have loans, the lenders will be concerned about their security and ask for the properties to be re-valued. When it is seen that the properties have fallen in value, the lenders will demand that the owners reduce their loans to fall into line with the loan documentation and banking covenants which many will be unable to do. This will then result in a wave of repossessions and other insolvency proceedings. As an example, assume someone bought a property 5 years ago for £500,000 let to Clintons’ at a rent of £35,000 per annum and took a loan of £400,000 or 80% of purchase price. If Clintons’ stay in this unit, but reduce their rent to say £30,000 per annum, then its value could fall to say £350,000.  The bank will then ask the owner for an additional £120,000 to reduce the loan from £400,000 to £280,000, which is 80% of £350,000, which means the owner will now have £220,000 of equity in this property. However, in this example, if Clintons’ decide to vacant this unit, it could very well be worth only £250,000 which means the owner would now need to find an additional £200,000. This would not be possible for most people who own secondary retail shops and who are also facing other financial difficulties.

I think as a result of this we will see a large number of bank repossessions, more vacant retail shops on our high streets, a fall in the value of these and other shops and less confidence in the retail sector in general.

Not since the demise of Woolworths has the UK seen a problem of this magnitude for the retail industry and commercial property market.