In recent times, Company Voluntary Arrangement (‘CVA’) are becoming an increasingly utilised insolvency mechanism for cash strapped companies to settle existing debts owed to their creditors (including their landlords) and perhaps most importantly, to avoid administration or liquidation.
Nevertheless, despite the recent popularity of CVA’s, there is a growing lobby of concern that CVA’s are being used by these companies who are also commercial tenants as a means of dodging arrears of rent due under their leases.
As such, given the increasing use of CVA’s in the current climate, commercial landlords should be aware of the potential ramifications for their properties and the inevitable knock on effect to their rental income.
An overview of the commercial property market
2020 was a challenging year for most businesses, a distressing year for a sizeable amount of those businesses and regrettably, a fatal year for some businesses. With the Government announcing a third national lockdown, which has now come into force and will be in effect until at least mid-February, many businesses are facing another period of significant economic uncertainty.
The UK Government has intervened with legislative measures designed to protect commercial tenants from financial demands and/or eviction – perhaps most notably, section 82 of the Coronavirus Act 2020 (moratorium on forfeiture for non-payment of rent) and the Corporate Insolvency and Governance Act 2020 (restrictions on Commercial Rent Arrears Recovery (“CRAR”) and winding up petitions).
The effect of COVID-19 on the commercial property sector has been well documented since March 2020, as landlord-tenant relations in certain sectors have been strained by the impact of COVID-19 restrictions. Landlords and tenants alike have been forced to weigh up their property requirements and come to the negotiating table to attempt to broker rental concessions and organise repayment plans. It is estimated that approximately £4.5 billion of rent debts have accumulated during the COVID-19 pandemic and the figure continues to rise.
Yet, despite government measures, many companies are still unable to meet their debts and are seeking ways of restructuring to stay afloat. The dire economic situation for a large portion of the retail/hospitality sector has led to several well-known chains entering into CVA’s – such as Caffe Nero, Pizza Express, New Look and Clarks Shoes. Other companies, such as Vue International Cinemas and Cineworld, have threatened entering into a CVA if their landlords do not agree to their new rent proposals. The use of CVAs has risen threefold (33 in 2020, up from 11 in 2019) and many commentators are signalling that a new wave of CVAs may be rolling in within the coming months.
Why enter into a CVA?
A CVA is an insolvency rescue procedure which allows a company to settle debts by paying a proportion of what it owes to its creditors and/or agreeing a mode of payments for present and future debts (e.g. annual rent, service charges etc…).
A CVA has to be proposed and agreed by at least 75% of the voting creditors at a meeting. If the 75% figure is hit, the CVA passes and becomes legally binding as at the date of the meeting.
A CVA can set out numerous proposed terms over a set period with regard the liabilities of the particular company – which can include the modification and variation of commercial lease terms (of which the parties had originally agreed to be bound by when they entered into the lease). Provisions such as rent concessions, rent reductions, new termination rights, dilapidations waivers and even a ‘COVID-19 Lockdown Relief’ clause (where rent is suspended in the event of a nationwide or even a tiered lockdown) have been seen in recent times.
The core feature of a CVA is its flexibility, as it gives commercial tenants the opportunity to set out (albeit, unilaterally) a variety of restructuring proposals.
The autonomy afforded to companies under the CVA procedure has led to accusations that some commercial tenants are abusing the process to write off substantial rent arrears and to absolve themselves of financial failings and mismanagement.
Commercial landlord lobbying groups, such as the British Property Federation, have called for a revamp of the existing insolvency law to make the CVA procedure fairer by giving proportionate voting rights in favour of those to which the CVA compromises the most (i.e. the voting rights being commensurate with the size of the debt owed by the company).
Tips for Commercial Landlords
Commercial landlords should be aware of their options at the outset of a CVA being proposed and it would be advisable put in place contingency plans ahead of any prospective CVA.
There are numerous factors that should be considered and if you are a landlord you would be well advised to obtain legal advice on the proposed terms of any CVA. However, some of the main considerations for commercial landlords are as follows:
- Preparation – make sure if you are entering into a new lease that you undertake due diligence on any incoming tenants. Monitor tenant liquidity throughout the term of the lease and keep an eye on the headlines for news/rumours regarding your tenant’s financial performance and position.
- Announcement – once your tenant has confirmed the CVA proposal, act promptly and review the terms of the CVA – or better still, have your solicitor do so for you. If you have a rent deposit in place, consider drawing against it (if there is outstanding rent due) as a CVA will usually restrict your right to draw against the deposit.
- Attendance – attendance at the creditors meeting is not compulsory, but being present is the best way that you can voice your opinion and ultimately vote for/against the proposal.
- Challenge – if the CVA is approved and there are grounds for challenge, consider whether you can make one. Although challenge is limited to two specific grounds under the 1986 Insolvency Act (which, in summary, are: (i) unfair prejudice and (ii) material irregularity), an experienced litigation solicitor or insolvency barrister will be able to advise you on the merits of a potential challenge.
- Exit Options – if you are unhappy with what has been proposed under the CVA, consider whether there are any exit options provided under the same OR whether you can forfeit the lease for insolvency (a landlords property rights are not usually extinguished by the CVA). If you have other eager prospective tenants in the wings, the financial benefit of a new tenant with greater covenant strength may outweigh another three years with a tenant that is unlikely to pay much towards rent.
Sharpe Pritchard has extensive experience in acting for a broad spectrum of commercial landlords in connection with CVA’s – from public bodies and local authorities to high net worth individuals and property investment companies. For further information on how we may be able to assist, please contact James Nelson on email@example.com.
This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published. If you would like further advice and assistance in relation to any of the issues raised in this article, please contact us today by telephone or email firstname.lastname@example.org.