A company voluntary arrangement (known as a CVA) can be an extremely useful tool for distressed companies that require breathing space to trade out of financial difficulties.
However, these arrangements often treat landlords (particularly retail landlords) less favourably than other creditors – for example, by requiring them to accept existing rent arrears being written off, to turnover rent being paid going forward, or even to no rent being paid at all for the period that the arrangement is in force.
As a landlord, you are not obliged to accept the terms recommended in a CVA proposal, but you could find yourself bound by them if the required proportion of creditors do not object to the proposal within the timeframe stipulated. You may also miss the opportunity to try to encourage tweaks to be made to the proposal, if you fail to seek specialist legal advice at an early stage.
Current position of landlords
In 2021, there were three high-profile attempts by large commercial landlords to defend against their treatment under proposed company voluntary arrangements (namely the landlords of New Look, Regis and Caffè Nero), but none of these challenges were successful.
That said, following concerns raised by the British Property Federation about landlords being unfairly prejudiced, the Insolvency Service have now commissioned specialist consultancy firm RSM to investigate the approach adopted against landlords in CVAs.
We await publication of RSM’s report with interest, but in the meantime Sanjay Chandarana, a partner in our litigation team, explains the things that landlords need to bear in mind when faced with a CVA proposal and how we can try to help to improve your prosects of recovering more of the monies you are owed.
CVA proposals
A CVA proposal sets outs various terms to deal with a tenant’s accrued and ongoing rent liabilities. You will usually have no less than 14 days to consider the proposal and decide whether to support them.
However, what you need to bear in mind is that:
- for a proposal to be considered fair, it must result in you being put in no worse a position than you would be in if the proposed arrangement was refused and the tenant was forced into whatever alternative insolvency process may be looming, i.e. administration or liquidation; and
- as part of the proposal (bearing in mind a CVA cannot eliminate your proprietary rights), you should always be provided the option to terminate the lease if you decide that the proposal is not acceptable, and this is the case even where the arrangement is approved and adopted i.e it has found the support of at least 75 per cent (in value) of the tenant’s total creditors.
Where these criteria are not satisfied, you may be able to challenge the CVA or at the least force the terms to be revised so that the criteria are met. However, you should be aware that contrary to popular belief there is no strict legal requirement for the proposals to ensure that, as a minimum, the amount you receive is equivalent to current market rates.
It is also important to note that where a tenant has multiple lettings with you, each will be treated separately and so it is possible for you to accept the terms of a CVA in respect of some leases and to reject them in respect of others and in any event, assuming the CVA is approved, to exercise your rights of termination instead.
To accept or not to accept?
You should evaluate the consequences of agreeing to be bound by the CVA against the company failing, and/or else exercising your right to bring the lease to an end. That may require specialist advice from an insolvency and commercial property specialist.
There is much to consider. For example, is it better for you to let the lease continue to run (on whatever terms) to avoid liability for business rates, insurance etc reverting to you while the tenant tries to sort themselves out? Or would you be better off terminating the lease (or accepting a surrender), so that you can try to find another tenant? If so, does this still make financial sense bearing in mind any rent-free period you would need to offer to get a new tenant on the hook?
How we can help
Given our in-depth knowledge of corporate insolvency, including the use of CVAs, we can advise you on the proposals you have received and whether they represent a good deal for you bearing in mind any alternatives. We can also advise whether we believe the proposals are reasonable, when compared with the treatment of other creditors and, where grounds for challenging the proposals exist, we can help you to pursue these. This could be with the aim of the CVA being rejected or it being revised to improve your position.
In some cases, it may be appropriate for the CVA to facilitate the establishment of a profit-share fund which could enable you and any other disproportionately affected creditors to share in any future profits of the business to provide redress for any perceived or actual unfairness in the proposals.
If you seek advice before a CVA is proposed – i.e. as soon as you become aware that the tenant may be financially struggling – we might also be able to help you secure payment of as much of the current outstanding debt as is possible, using all the usual tools available, including:
- drawing down on the tenant’s rent deposit;
- claiming entitlement to any rent paid by a sub-tenant;
- enforcing the terms of a personal guarantee;
pursuing a former tenant where permissible;- using the Commercial Rent Arrears Recovery (CRAR) process; and
- effecting forfeiture, where appropriate.
More information
To find out more, please contact Sanjay in our litigation team on 020 7845 7400 or by email to sanjaychandarana@iwg.co.uk.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.