20 September 2022

Landlords on alert as Cineworld collapse raises spectre of widespread closures – Andrew Denye speaks to CoStar

Head of Retail, Andrew Denye, has offered his comments to CoStar News on how Britain’s Cineworld, the world’s second-biggest cinema chain, has filed for bankruptcy protection in the US in a move that has left landlords across the country staring down the barrel of widespread anchor-unit closures.

The group operates 751 movie theatres including more than 500 in the US, as well as more than 100 in the United Kingdom and Ireland. In Britain it also owns the Picturehouse chain.

Cineworld said in a statement that it had filed for Chapter 11 protection, a court-supervised restructuring in the US that gives companies breathing space to negotiate with creditors on debt.

It confirmed it will try to renegotiate leases, while existing management will stay in post.

It added that it aims to emerge from bankruptcy proceedings in the first quarter of 2023 and had secured $1.94 billion in financing from existing lenders.

Landlords across the country will clearly be concerned that a key tenant in major developments is about to exit, or seek to sublet space, with the recent disappearance of department stores such as Debenhams from the high street and malls a worrying precedent in terms of scale.

Andrew says Cineworld appeared to be facing a perfect storm of the dramatic impact of COVID-19 on cinema attendance, followed by the cost of living crisis and finally the problem that not enough "top-notch" films are being produced.

"Then they have a significant amount of debt. And it is almost a classic case of 'big is not always best' as they have a huge number of big buildings at a time when for numerous reasons cinemagoers don't really need all that space. There is talk of a sizeable chunk of money there to help them, but a problem is the market has moved to the high end with Everyman, or lower end, and Cineworld has tracked through the middle to a degree."

In terms of what lease negotiations with landlords will look like, Denye said Cinewold may choose the company voluntary arrangement route, a method of restructuring real estate in the UK that has been much less used in the past 12 months as market conditions have improved for retailers and leisure operators.

CVAs are legally binding agreements with a company's creditors to allow a proportion of its debts to be paid back over time and need 75% of the creditors, by value, to support the proposal. For a review of why they have been controversial in the UK and why they have been few and far between recently click here.

What Ever Happened to the Landlord Fight Against CVAs?

"They may go the CVA route which immediately solves the negotiation point as it is what it is. If they try to renegotiate leases, because their spaces are so large they are effectively an anchor so ultimately landlords will do what they can to help them keep the doors open; the alternative is going to be very painful."

That is because fitting out a cinema is extremely expensive and the auditorium for instance is more difficult to repurpose than for instance department store space.

"It is going to require a sizeable cheque," Denye agrees. "We will see closures, that is clear, but we also might see them try to carve out underlet portions of space."

Denye said there is a real prospect of more CVAs again this year from operators.

"I think, that 2021 we saw an improvement in conditions for retail and leisure as people got out and about. But I think the energy crisis will have a dramatic impact and even this week I have seen occupiers put things on pause citing the cost of energy."

In terms of Cineworld's likely cause of action Denye says it is too early to tell. "All we know is what they have done in the States, but landlords up and down the country will be expecting a phone call or more likely will be making a phone call. It is a genuine asset management challenge."
Recently Cineworld was on the losing end of a critical legal battle over COVID-19 rent arrears which will also be a backdrop to negotiations.

London Trocadero and the Bank of New York Mellon were backed at the Court of Appeal in linked landlord test cases against Picturehouse Cinemas and Cine-UK in a decision with major implications for commercial landlords and tenant negotiations in England and Wales.
A three-judge panel dismissed the two claims from the tenants ultimately including Cine-UK and Cineworld. The Trocadero case against Picturehouse Group related to £2.9 million of specific rent arrears owed, but many other landlords and tenants have been awaiting the decision. For a review of three critical cases focused on the matter during the pandemic click here.

This article was originally published on 8 September 2022 on the CoStar website and can be found here (behind their paywall).

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