What is a CVA?
A CVA is an insolvency and rescue procedure under the Insolvency Act 1986, allowing a company in financial distress to make legally binding arrangements with its unsecured creditors. Typically, this involves rescheduling or reducing the company’s debts or even amending certain contractual terms.
A CVA is a flexible and relatively cheap process requiring limited court involvement, although an insolvency practitioner will need to be engaged. A CVA must be approved by at least 75 per cent in value of the company’s creditors who participate in the voting meeting. Once approved, a CVA will bind all unsecured creditors regardless of whether (or how) they voted. Unsecured creditors will not be entitled to take any step against the company to recover debts within the scope of the CVA.
How might a CVA affect landlords?
A CVA can allow a tenant company to restructure its rent obligations or, by statutory concession, alter the effect of its lease terms across some or all of its premises. CVAs are promoted on the basis that they offer a landlord more than if the tenant were to enter a more terminal insolvency process, such as liquidation. Some stores will be kept open, rates will be paid and the landlord will receive at least some rent, which is better than no rent at all.
However, the inherent flexibility of a CVA means that a tenant’s proposals might include, for the duration of the arrangement, any proposals such as reducing future rent, amending lease covenants and suspending a landlord’s right to forfeit a lease.
Practical advice for landlords
A landlord may look to protect itself against CVA risk in several ways; occasionally, this may include taking action at lease negotiation stage, where the risks appear to warrant this.
- Become a secured creditor: A CVA cannot affect the rights of a secured creditor to enforce its security without the security holder’s consent so a landlord could investigate whether there are ways to take a charge over the rental income of a lease where there is an inherent value to the lease. In addition, when taking a rent deposit from a tenant on the grant of a new lease it may be beneficial to a landlord to consider using a charge structure rather than, for example, a trust arrangement, as the landlord's claim will be secured to the value of the deposited sum. It should also be noted that in the case of Scottish leases, a landlord may be a secured creditor by virtue of landlord's hypothec, a statutory security that arises over tenant-owned moveable goods on the premises where there is rent that is "due and unpaid".
- Trigger repayment in the event of the proposal of a CVA: Consider drafting the lease and rent deposit deed such that certain sums become payable upon the tenant proposing a CVA, for example, repayment of incentives or reimbursement for rent-free periods. To avoid the repayment being regarded as a penalty, consider structuring incentives as a loan. If the tenant fails to pay, the landlord could draw down from the rent deposit.
- Think about your lease term: Some landlords may look to reduce lease terms across their portfolios where appropriate, in order to reduce exposure to a potential CVA. However, this may not always be practical from a commercial point of view and may not be necessary given that, as stated below, landlords are often offered an ability to terminate a lease whose terms have been compromised by a CVA.
- Seek advice on guarantee terms: It is less common (but not impossible) for a CVA to compromise the liability of the guarantor to the landlord, although intra-group liabilities between tenant and guarantor would usually be extinguished. Landlords may therefore wish to seek parent company guarantees more often. Consider placing an obligation on the guarantor to make good any shortfall between the passing rent and the reduced rent imposed under any CVA. This obligation may survive a CVA.
- Once a CVA appears likely, act promptly and carefully review the CVA terms: Creditors will get fourteen days’ notice for voting by correspondence or electronically and just seven days’ notice for a physical meeting: make prompt arrangements to review the terms and participate in the vote. Also, check the stated outcomes in alternative insolvency regimes, such as liquidation, and whether there is scope to negotiate any modifications. Assess the impact of any provisions that are expressed to survive the CVA’s termination: these are important but are often overlooked. Importantly, ensure there are no terms which could potentially impact the landlord’s rights against any guarantors.
- Increased forfeiture rights (or irritancy rights in Scottish leases): Some landlords now require that forfeiture can be triggered not merely on the tenant entering into a voluntary arrangement but also on the tenant making a proposal for such an arrangement. However, often where rent is being reduced by the CVA, the CVA will give the landlord an ability to terminate the lease in any event.
- Obtain the maximum value of any claim for voting purposes: A landlord’s claim will usually comprise amounts due for arrears of rent, future rent and perhaps an amount in respect of dilapidations. The latter two are considered to be unascertainable sums and will be prescribed a value of only £1, unless the chairperson decides otherwise. Try to submit evidence for why a higher value should be ascribed, for example evidence of how long it will take to re-let or an independent assessment of dilapidations costs. Repayment of incentives should also be included in the landlord's claim, save to the extent recoverable from a rent deposit. However, most "landlord-only" CVAs include a voting formula for landlords' claims which, when coupled with the chairman's discretion to value unascertained or unliquidated claims at £1, make it difficult to challenge the treatment of future rent for voting purposes as unfair or irregular.
- Co-operate: Seek out other like-minded landlords/creditors with whom it might be possible to act in concert, to reject or seek modifications to a tenant’s proposals.
- Can you challenge the CVA? A CVA can only be challenged in limited situations.
- Where the CVA unfairly prejudices the rights of one or more creditors. With the current spate of CVAs aimed at reducing property costs, it can only be a matter of time before there is a challenge on the basis that unsecured trade creditors are being preferred to landlord creditors.
- Where there has been a “material irregularity” in relation to the conduct of the CVA, including the convening of meetings or the decision making process. Monitor meetings and documentation carefully to see if any such irregularity has occurred.
- Be aware: Some retailers have announced their intention to seek provisions in new leases whereby rent is reduced by the same proportion as that which has been approved in a CVA of another tenant in the same shopping centre or vicinity. It will be up to landlords to decide whether or not this type of clause will be acceptable. However, landlords may find it particularly difficult to sell a retail investment where leases include such a clause, due to the landlord’s inability to prevent a CVA and the likely impact on value if these clauses were to become commonplace - one tenant entering into a CVA could have far reaching ramifications on the value of the shopping centre.
A landlord’s attitude towards a particular CVA will differ from proposal to proposal and will depend (amongst other factors) upon the scale of the proposed changes, the market for its property and the rental levels which may be obtained on a re-letting. However, to get the best protection and outcome when a CVA proposal is made by a tenant, landlords should consider the possibility of future CVAs at the outset of any new deal and, if a CVA is ultimately proposed, carefully scrutinise its terms, participate in the approval process and fully exercise their rights to make representations and vote.
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