What is a CVA?
A company voluntary arrangement (CVA) is an insolvency and rescue procedure under Part 1 of the Insolvency Act 1986 which allows a company to settle its debts by paying only a proportion of the amount that it owes its unsecured creditors or by coming to another compromise arrangement with its unsecured creditors over the payment of its debts, provided 75% of those creditors (by value) vote to approve the CVA. CVAs were designed to help businesses keep trading while they came to an arrangement to repay creditors and in the context of commercial lettings, allows a tenant company to keep trading and to stay in the premises.
The current climate
Over the past year, there have been an increasing number of retailers who have sought to implement CVAs, several of these being well known high street chains such as Prezzo, Jamie’s Italian, Byron and New Look.
On 20 June 2018, the British Property Federation (BPF) issued a press release stating that “retailers and property owners need to work together to rise to this challenge, and to plan and navigate to a successful future”. Despite this sentiment, landlords are becoming increasingly frustrated with the CVA process as they are seeing their contractual relationships undermined by CVAs that have been imposed on them.
Why have CVAs historically been supported by landlords?
In a retail context, landlords do not usually take security for the tenant’s lease obligations and therefore they are likely to be unsecured creditors of a tenant company if it enters administration or liquidation. This would put them behind secured creditors and therefore less likely to recoup any outstanding payments or arrears. Landlords also want to keep their stores open and it can be beneficial to give a tenant company the breathing room they need to restructure in order to avoid administration or liquidation.
Why are landlords now seeking reform?
Although there are benefits to CVAs from a landlord’s perspective, with the biggest strength to CVAs being their flexibility, there are some serious pitfalls. Whilst there is no ‘standard’ CVA, a CVA may allow a tenant company to unilaterally vary its lease terms, including for example the payment of rent monthly rather than quarterly. A CVA may also allow a tenant company to reduce the rent payable under the lease. For smaller landlords, the financial impact of a rent reduction imposed by a CVA can be significant.
Steps for landlords
If a CVA is proposed by a tenant company, landlords must consider the implications for them and their rental income very carefully. Landlords should seek advice at an early stage and remember to act quickly.
A company proposing a CVA only has to give 14 days’ notice to creditors of the meeting at which the creditors will consider and vote on the CVA proposal. Once the CVA is approved, a CVA will bind a landlord creditor, and all other unsecured creditors, regardless of whether the landlord voted for or against the CVA, and whether or not the landlord attended the creditors’ meeting. No unsecured creditor can take any step against the tenant company to recover any debt that falls due within the scope of the CVA, once it is effective.
Every CVA is distinct so landlords should carefully examine its terms. A CVA may, in certain limited circumstances, be challenged within 28 days of its approval being reported if the CVA unfairly prejudices a creditor in the context of the overall effect of the CVA.
Where possible, landlords should consider taking action against the tenant company to obtain possession of a premises prior to the approval of the CVA. This may not be possible where the tenant is already in administration and the CVA is being proposed by the company’s administrators or where the tenant is a small company, in which case companies can seek the protection of a moratorium as part of its proposal for the CVA. In such circumstances, landlords will be prevented from taking any enforcement steps against the tenant, pending consideration of the CVA proposal.
Should a landlord (who does not have the requisite majority to vote against the CVA proposals) reject or wish to modify the CVA proposals, it should seek out other like-minded landlords/creditors with whom it may be possible to act jointly to reject or seek modifications to the tenant company’s proposals.
Recent case law has held that a CVA clause is valid, even when it provides for a landlord’s full entitlement to rent to be restored in the event of a CVA failing. This entitlement may also take effect as an expense of an administration if the company subsequently goes into administration. In the absence of such a clause in the CVA proposals, landlords may seek to obtain a similar provision in order to protect their position.
Ultimately, a landlord’s approach to a particular CVA will vary from proposal to proposal and will rest on various factors such as the extent to which their debts are compromised, the likely rent level which the landlord may achieve on a re-letting, and the market for the landlord’s property.
As such, landlords should be aware of their rights in the event of the CVA being approved, as well as in the event of a failure of the CVA and/or the tenant company subsequently entering administration or liquidation.
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