Company Voluntary Arrangements (CVAs) and the effect on Landlords
Brexit and the decline of the retail sector have been hot topics over the past year resulting in a large number of CVAs; the most recent being Philip Green's Arcadia Group.
What is a CVA?
According to Company Debt a 'Company Voluntary Arrangement' is “a statutory agreement between an insolvent limited company and its creditors”. To be eligible for a CVA, the company must be limited and have appointed an insolvency practitioner to prove the company has a viable future and can be recovered.
The CVA gives the business time to restructure and plan how they will repay part, or all the money owed to the creditors, provided 75% of the creditors approve the terms proposed. If approved, the business usually has between 1 and 5 years to repay its debts; however, if the company defaults on the scheduled payments, the business will be liquidated.
From a business’ point of view, this is the preferred outcome compared to liquidation and administration as the directors will remain in control and there will be little effect on the company’s day to day running. However, on the other side of the coin, is the potential detrimental effect to the Landlord…
Landlords have limited control when approached by a tenant who has entered into a CVA; they can either renegotiate terms with big rent reductions or face having an empty unit with no rental income and high business rates. In these uncertain times within the retail sector, the landlord has to endure the repercussions when in fact the tenant is responsible for the failing business.
Landlords have limited voting rights compared to the creditors and the unfair treatment to a landlord has been a big talking point recently especially in the case of House of Fraser. With the CVA process becoming prejudiced against landlords, five landlords took action against House of Fraser which consequently led to the legal action being dropped and a settlement of £200,000 being given to each Landlord. Unfortunately for the Landlords, they only received a small amount of this settlement as House of Fraser went into administration. Following the House of Fraser case, landlords are in a much stronger position to challenge biased treatment and request more transparency.
If you are a landlord and a tenant of yours is entering into a CVA, we would advise you to act quickly, review the proposed terms of the CVA thoroughly as it could contain unfairly prejudicial terms against you, and if concessions are to be agreed, ensure they are only temporary. Under the terms of a CVA, a landlord can choose to break the lease provided 60 days’ notice is given; this is worth considering if a better or similar tenant is willing to take on the premises or there is development potential.
Please contact us if you would like to discuss this further.