Christmas Quarter Day is fast approaching for a retail industry where confidence has probably worsened in the last three months rather than improved.
The market as a whole has been through a turbulent time for the last few months, most recently because of the mounting debt crisis in Greece, Italy and Spain and its impact on the Eurozone.
Confidence has not been boosted by the Bank of England’s statement that the risk of a further financial crisis is at its greatest since the collapse of Lehman Brothers in 2008 and also by a recent survey by R3, the Association of Business Recovery Professionals, in which apparently some ten per cent of retailers expect to end up in administration within the next 12 months.
Entering into administration adds further difficulties as a result of the recent decision in Goldacre (Offices) Limited v Nortel Networks UK Limited (in administration) to the effect that an administrator will be liable for the rent as an expense of the administration in certain circumstances, depending on whether or not the property has been used by him or her during the administration.
This will possibly determine whether or not the company will go into administration before Christmas or wait until immediately thereafter.
It should also be remembered that the three months prior to Christmas is the equivalent of five months of normal trading, whereas the three months after Christmas are normally equivalent to about one month’s trading.
Those factors make the trading period spanning the run-up to Christmas so significant - a situation reflected by the fact that the terms for many rental payments have moved from quarterly to monthly. In the end, some retailers are more than likely to trade through to Christmas and then liquidate immediately thereafter without paying the quarter day’s rental payment.
It used to be that the Christmas sales did not start until Boxing Day. Those days have long gone, as there are plenty of shops that are now involved in early sales.
The question is how an average customer will respond to such offers: will they feel that they should buy now because they will never get such a bargain again; or maybe wait out the early sales in the hope of seeing the price go down even further?
One of the problems caused by so many early sales during the last few years is that this once-useful tool has now probably been diluted to such an extent that it no longer represents a genuine incentive for a potential customer to buy.
Again, will we see a second or third form of CVA for a sizeable retailer? This is a distinct possibility.
Another issue to consider is that the Christmas quarter rent day does have an effect upon suppliers and wholesalers. Traditionally, they used to be paid some 30-60 days after delivery. Now many of them are insisting upon some form of payment upfront.
November and December are also significant because of the wage payments that have to be made, and because this time of the year sees the highest VAT output.
What continues to be outstanding is the resilience and ability of retailers to defy economic gravity and avoid entering into formal insolvency proceedings. Part of this is the extreme reluctance of banks to appoint administrators.
Also, many of the banks are keeping some of their retail customers in business by allowing loan repayments to be deferred further and further into the horizon in the hope that they will be affordable in the future.
Some of the people I have spoken to over the last few months expect that the bubble will burst, and for them it is a question of when and how big the bubble will be at that time.
Landlords continue to be reasonable and are prepared to engage in dialogue with tenants (and not just retail ones) who are in genuine financial difficulties. The Crown is also prepared to enter into a dialogue, but one cannot safely predict how much longer that will last.
One essential point is that once the dialogue has begun, a retailer should be transparent and upfront. The likes of landlords and the Crown do not like surprises.
The run-up to Christmas is bound to entail more pain for the retail sector. The only question is how deep that pain will go.
Richard Curtin is a lawyer in the finance and restructuring practice at international law firm Faegre & Benson LLP.