Care home firm battles for survival

A crisis-hit care home company has agreed to underpay its rent as part of a survival package.

Southern Cross operates 750 care homes across the UK and is responsible for the welfare of 31,000 residents.

It has agreed to pay almost a third less rent on its properties over the next four months after struggling to meet its £230 million annual rent bill. The firm announced six-month losses of £311 million in March.

The Darlington-based company will repay the rent shortfall to its landlords when it is in a position to do so. It also has until the end of the four-month period to agree a deal with its lending banks.

Adding to the Southern’s problems is reduced income from local authority fees, as fewer councils place residents with the company.

Local authority admissions declined by 15% in the first half of its financial year, though there were more NHS referrals and private patients. Councils and the NHS account for 70% of the company’s patients.

Southern consequently saw revenues drop 3% to £464 million in the first half, as overall occupancy declined by 3% to just under 87%.

The ongoing negotiations include a potential longer-term rent cut and disposals of some homes.

Some landlords, particularly those which are care home operators themselves such as Four Seasons, could choose to take back some of Southern’s homes.

It has also been reported that up to 200 homes could close with patients moved to other premises.

Tom Williams, Solicitor in IBB's Corporate and Commercial team, comments: "Declining revenues due to the government's austerity drive and a commercially unsuccessful sale and leaseback strategy to promote growth are major factors that have resulted in Southern Cross engaging with its landlord creditors.

"The business model provided no flexibility for the company in the event of a downturn in the market and has seen Southern Cross locked into long leases on upwards only rents for the foreseeable future. It remains to be seen whether the lenders will be as accommodating as the institutional landlords when the temporary arrangement comes to an end."

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