2018 - The Year Of The CVA. What Does That Mean If You Are A Landlord?

As many predicted last year, 2018 is certainly shaping up as the year of the CVA – company voluntary arrangement.  2018 alone has seen a large number of  well-known high street and casual dining outfits enter into CVAs such as New Look, Maplin, Prezzo, Jamie’s Italian, Carpetright and Select to name a few.

What are they, why are we seeing them and what do they mean for landlords?

A CVA is a legally binding arrangement or compromise between a company and its creditors usually involving reducing or rescheduling a company’s debts but it can also change the contractual terms between a company and some or all of its creditors. The arrangement is supervised by a licensed insolvency practitioner. 75% of the creditors, by value, who voted need to support the proposal. There is a further condition that no more than 50% (by value) of any creditors who vote against the proposal are creditors who are unconnected with the company.

 Once approved the proposal binds all unsecured creditors irrespective of who actually voted. It is worth noting, however, that a CVA can be challenged in court. 

Often the largest unsecured creditor of the company is the owner that has lent money to it. This means they can influence a large proportion of the vote. CVAs are a useful tool for tenants/companies in that they are flexible. They can be used it to get out of leases and close branches, to secure rent reductions to make the sites more viable, to amend lease terms including removing a landlord’s right to forfeit a lease, to restructure the company’s debts and/or  to make alterations to its management team while continuing to trade.  

A CVA does not mean there is an automatic moratorium but in certain circumstances there can be one. From a landlord’s perspective, a CVA moratorium prevents: the forfeiture of the lease by peaceable re-entry, the enforcement of rent against the company's assets, and the use of various procedures and proceedings to recover debts due without the leave of the court. It therefore makes sense for a landlord to take action against the tenant to recover possession of a premises and/or pursue any relevant remedies before the CVA is approved- given that once it is entered into the landlord is bound by its terms.

Where a landlord is bound by the CVA, all rent arrears will be caught by the terms of the CVA, as well as the tenant's liability for all other sums that are due and will become due under the lease, including future rent, and dilapidation claims, unless the terms of the CVA exclude those claims from its scope. However, even after a CVA comes into effect, it is open to the parties to agree a further compromise of the landlord's claim against the tenant.

Often landlords will benefit from either a rent deposit or a guarantee. Provided that the guarantee provides that the guarantor's liability is unaffected by the compromise of the principal debt, the CVA of a tenant whose rent obligations are guaranteed will not release the guarantor from its liability. In principle, a CVA can expressly release a guarantor of the debtor company from its guarantee obligations, provided that it adequately compensates the relevant creditor for the loss of its rights against the guarantor.

As the terms of a CVA may or may not benefit a landlord it is important for a landlord to participate in the approval process to influence the proposal. A CVA often results in a landlord getting perhaps more rent than it might otherwise have done (compared to a liquidation) and also not having to pay business rates for empty premises.

But, it is also worth remembering, as the retail and casual dining sector has shown that CVAs are not often successful. A landlord should find out what its rights are if the company enters into another insolvency process but more importantly, what happens if they simply terminate/fail. Take for example the BHS CVA. Following termination, the landlord was entitled to claim the full amount of outstanding rent (less any amounts received under the CVA), not just the compromised rent. (Of course whether it is actually paid is another matter). That said the CVAs this year, unlike BHS, have terms where by any rent compromises continue once the CVA has terminated. 

The CVA is a fairly informal, flexible and cheaper insolvency procedure and is gaining in popularity. With that and the current economic and political situation we now find ourselves in, it is likely that we will see more CVAs this year. Landlords take note.

This article first appeared in CoStar.