Once I have a contract it is binding unless the other side goes bust – right?
One party to a contract cannot unilaterally change the deal – right?
If a commercial tenant does not pay its rent the landlord can forfeit – right?
As landlords have found to their cost this year, the answer is that a CVA can challenge all of these assumptions.
CVAs were introduced as part of the rescue culture designed to preserve viable businesses where possible rather than force them into liquidation. The legislation is simple- all that is required is a vote by at least 75% of creditors by value, in favour of the proposal.
A company does not have to be insolvent to go into a CVA. Nor does the insolvency concept that all creditors are to be treated equally apply to a CVA.
A CVA takes the form of a hypothetical contract so anything that a contract can do, a CVA can do. It can vary existing agreements and do so in a way that treats creditors differently. So it can remove rights of termination, impose rent reductions, change repairing obligations and give tenants new termination rights; all without the agreement of the individual landlord concerned.
Is there anything that landlords can do to avoid this nightmarish outcome?
- They can vote the proposal down (although voting rights have been measured in a way that limits their powers in recent examples).
- They can suggest changes to the proposals, which may be adopted if they strengthen the prospects of the CVA being passed and surviving a legal challenge.
- They can challenge the approval of the CVA if they are quick (there is an 18 day challenge period) and if they can show that one landlord or a group of landlords have been unfairly prejudiced by the proposals.
Typical forms of CVAs in use today do not just focus on rent and limiting dilapidations. Most also seek to compromise or waive any other claims that a landlord may have - past, present and future - other than to pay the revised rent, insurance and service charge. This changes an FRI lease into one with few enforceable obligations on the tenant. There has not yet been much comment on this aspect of CVAs. However, as affected leases run their course many landlords will come up against this further nightmare when seeking to enforce obligations down the line.