CVAs (Company Voluntary Arrangements) has risen to increased prominence recently, employed by a number of well known, high street retail brands, to prevent businesses from going into liquidation or administration.
The UK’s economic and social climate is undergoing a period of rapid change, with decreasing footfall in our high streets and a reduction in spending power. Landlords can no longer assume that a traditional, long term lease can guarantee rental income for the duration of the lease. The following is a rough guide to CVA’s in operation.
CVA Process
- Following a formal decision by directors to enter into a CVA, an insolvency practitioner is appointed to set up the arrangement.
- The practitioner will review the company’s operations and financial processes to produce a draft proposal to be lodged at court. Proposal copies are then sent to all unsecured creditors (of which the landlord is one)
- Creditors vote - In order for the CVA to be approved, it must be approved by creditors who are owed at least 75% of the debt.
- If 75% of creditors (by the value of debt) vote in favour, debts are frozen and all creditors will be bound by the CVA terms. If the vote is not in favour, the tenant will face the possibility of voluntary liquidation.
If a limited company becomes insolvent a CVA can be used to pay creditors (in this instance landlords) over a fixed period, or payment schedule, and potentially enable the limited company to continue trading.
Commercial Considerations
Landlords must be mindful of the implications that the terms of a CVA proposed by a tenant can have on them. A CVA can grant a tenant the ability to alter its lease terms or restructure its rent obligations on properties, even without the consent of the landlord. More controversial tenant proposals may even involve removing a landlord’s right to forfeit a lease. Thus, it is imperative that a landlord is aware of their rights to challenge a CVA, even when it has been approved.
Landlord’s Options
Most commercial leases afford the landlord irritancy rights. If the lease can be irritated before the CVA is effective, the landlord will avoid an obligation to accept reduced rent amounts. Once approved however, a landlord can only challenge under section 6 of the Insolvency Act 1986.
Indeed, a landlord can challenge a CVA within 28 days of its approval being reported, on two grounds: (i) unfair prejudice and (ii) material irregularity. Such a challenge was made by landlords against House of Fraser’s CVA proposal. Indeed, the landlords claimed ‘unfair prejudice’, leading to an out-of-court settlement.
CVAs in action
Most CVAs are successfully passed – Toys ‘R’ Us gaining considerable backing by landlords in 2017, with creditors promised returns on the basis of any future success of the business. However, an example of a CVA agreement that conveys the weight of the landlord’s influence, is that between Arcadia Group and its creditors. Seven different CVAs were voted on, until finally Arcadia promised £9.5 million to reduce the rent cuts for landlords. By collectively voting against the CVA, the landlords were able to obtain more favourable terms.
It is essential that landlords remain aware of the marketability of their property, and be prepared to challenge the CVA where appropriate. Long term, it may be, that a trend towards flexible lease arrangements will develop, enabling an adjustment to the changing market conditions throughout the duration. Regardless, both landlords and tenants must consider the market conditions when entering a long-term lease.
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