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CVAs and Commercial Property

A practical guide for Landlords and Tenant Retailers

We asked Lloyd Biscoe from Begbies Traynor Southend, business rescue and insolvency practitioners, to give some practical guidance on Company Voluntary Arrangements (CVA) and in particular how they affect landlords and tenants of commercial property. With House of Fraser, Gourmet Burger Kitchen, Jamie’s Italian and Barbecoa all making the news in 2018, industry commentators are anticipating a further spate of Company Voluntary Arrangements in the first quarter of 2019 in the midst of a difficult retail marketplace. We asked Lloyd to answer some common questions for both landlords and tenants when faced with a CVA proposal which could have a serious impact on their livelihoods.

What is a CVA?

A CVA is a legally binding agreement between the company in trouble and its unsecured creditors to allow a proportion of its liabilities to be paid back over time in full and final settlement of those accrued liabilities. A decision procedure of creditors to consider the terms of the CVA is convened and approval of the CVA requires 75% of the creditors by value who vote on the decision to approve it.

Once the proposal has been approved then all unsecured creditors of the company are bound by the arrangement. The company can carry on trading as usual and the directors will remain in control. The CVA is monitored by a supervisor who has to be a licensed insolvency practitioner. The arrangement is based on the company’s unique position and typically lasts up to five years for a monthly contribution based arrangement or shorter if a lump sum settlement is proposed.

  • A solution for a Company suffering financial difficulties where the underlying business is capable of restructure;
  • Upon approval, a CVA binds various classes of creditor thus providing relief from creditor pressure;
  • The Board and Shareholders will remain in control of the company throughout;
  • CVA’s have much lower costs than alternative formal insolvency procedures;
  • There is no requirement for a public announcement in the same way that an administration is publicised, but it is recorded at Companies House;
  • There is no requirement to tell your customers that the company has entered into a CVA;
  • Importantly, creditors benefit from the receipt of a dividend over a period of time. To propose a CVA, the Company has to return a greater sum than would be available in an insolvent liquidation or administration.
  • The company in CVA can continue to trade with its existing suppliers, subject to their agreement to do so.

This article concentrates on the impact of a CVA on landlords and tenants of commercial property (commercial leases) and below we ask Lloyd Biscoe some of the most commonly asked questions on behalf of both interested parties:

Why would you negotiate with your landlord?

For a retailer or a tenant, it makes sense to start with your landlord and to see if a rent reduction can be achieved. Any Board of Directors has an obligation to maximise efficiencies in the business particularly in a difficult trading environment. Coupled with the fact that for most retailers, the commercial property expenditure is the main expense for the business (staff costs aside), making savings on rent is a good idea and if a retailer hasn’t been able to achieve a rent reduction by discussion or negotiation, then a CVA remains an option.

Can a lease be terminated through a CVA?

No, at least not without prior agreement with the landlord. If no agreement, the Company can breach the terms of the lease prior to the CVA taking effect and vacate the leased premises, thus triggering termination. The liabilities resulting from the termination can then be included in the CVA. These liabilities are adjudicated upon by the appointed CVA Supervisor prior to the payment of any dividend.

Can a CVA proposal require the landlord to accept a rent reduction?

Recent CVA proposals have required the landlords to accept high value rent reductions. For example, in the case of House of Fraser, landlords were separated into varying classes and some only received 10% rent. The landlords were bound by the CVA terms as the requisite majority of 75% of the creditors by value who voted were in favour of the terms. However, this approach should be treated with caution. In the case of House of Fraser, landlords argued that they were being unfairly prejudiced by the CVA process. The landlords mounted a legal challenge which was subsequently settled out of court.

Whilst the above demonstrates potential issues that may arise, most landlords will likely conclude that receipt of some rent with continued occupation is a better alternative than an empty property for which they have to arrange security, pay empty property rates and source a new tenant.

What if I only have one premises or outlet? Can I still obtain a rent reduction?

The starting point is to ask your landlord. Unless the landlord is satisfied that there is an alternative tenant, or if their own circumstances require a certain rent to be paid (for example their own lending on the property), the reality is that most landlords are commercially sensible and are aware of market pressures.

It is important to note for tenants to review the terms of the lease and determine when the break clause can be triggered as this can be used as an additional tool in the negotiations.

Can the landlord take any action to end the lease?

If under the terms of a lease there are relevant insolvency clauses in place, landlords can choose to break the leases because the tenant has entered into an insolvency process. This is a tempting prospect for many property owners with desirable commercial property if they maintain a belief that a greater rent can be achieved by re-letting the property to a new tenant.

Are there any other considerations?

Yes. You should always take professional advice as a company considering a CVA. In the context of leases, you need to check the terms of the lease very carefully. Have you or other Directors given a personal guarantee for any of the obligations under the lease? Remember that the CVA is a very flexible tool and that there are many options to be considered – not merely a rent reduction. It may be that through negotiation, future rent can be reduced but similarly, other covenants under the lease can be made more flexible or less onerous for the tenant, and often, guarantee rights against a parent (or more solvent company) can be removed or reduced. This is known as guarantee stripping and can be considered carefully through proper advice.

What implications arise resulting from a tenant’s CVA proposal?

A landlord should recognise that their tenant is insolvent. Often a landlord would not have taken security for the obligations owed by a tenant company. A CVA offers a mechanism that allows a tenant company to restructure its rent covenants or change the terms of its lease(s) across some or all of its premises. Often this is to the disadvantage of the landlord.

What are the advantages of a CVA?

Quite simply, for a landlord, continuity of tenant including the payment of current and future rents. Having a tenant in occupation means that the tenant continues paying business rates rather than these becoming the responsibility of the landlord. The fact that the tenant can continue to trade in a CVA procedure means a reduction of risk to a landlord of having empty units and elimination of cost in terms of sourcing new tenants. This is particularly important in today’s uncertain retail marketplace. A CVA will also offer of a better financial outcome to creditors in respect of liabilities owed at the point of entering the CVA than a more terminal insolvency procedure such as a liquidation.

What should a landlord do if they are faced with the prospect of a tenant’s CVA?

1. Take professional advice and do so quickly. Strict time limits apply and a tenant has to give only 14 days notice a decision procedure to consider the CVA proposal.

2. Look at the CVA proposal very carefully. A challenge procedure through the court is available but only within 28 days of its approval and if it unfairly prejudices a creditor.

3. Ensure that you’ve included the maximum amount of voting value. Include the claim for any arrears already due under the lease, and any claim for future rent which hasn’t yet fallen due and any breach of the terms of the lease such as dilapidations. There can be limitations on what can be included for the sums which are not due yet and those can be very limited in the absence of proper advice.

4. Find out if you can take any separate action against the tenant prior to the CVA? Can you enforce the arrears or take back possession under the terms of the lease? Also consider any guarantees given in respect of the lease commitments.

5. Can you join forces with other creditors with similar interests to influence the CVA proposal? Often a lone creditor will not be a major creditor by voting value as tenants often pay their landlords on time to the detriment of other creditors because they don’t want to risk their lease being forfeited.

6. Take professional advice as to whether the procedure followed by the tenant is valid and whether it can be challenged at all? CVAs are not always successful and so it is important you’re aware of the next stages, for example if the company enters into liquidation or administration.

7. Be aware of the commercial realities of the asset class that you hold. Empty properties attract their own problems, such as squatters and general security. The economic environment is uncertain but that means it can improve.

Begbies Traynor, business rescue and insolvency practitioners

Lloyd commenced working in insolvency and has been at the Southend office of Begbies Traynor since 1991. He is a Fellow of the Insolvency Practitioners Association and R3. In addition to overseeing a wide portfolio of cases, he also accepts insolvency appointments and is a specialist in Company Voluntary Arrangements and can advise both landlords and tenants faced with a CVA scenario.

Email: [email protected]