Summary: Relationships between landlords and insolvency practitioners have taken a wrong turn recently over the issue of CVAs. There is little that landlords can do to protect themselves from the impact of a CVA, so a confrontation in the courts may be inevitable. CVAs currently do not allow for landlords to be flexible, so they find often themselves as scapegoats in major restructurings. A conflict can be avoided, but serious change needs to happen soon.

Landlords painted with the wrong brush

As colleagues have mentioned here there is a world of difference between a retail store that is truly overrented, based on the local market, and a store that is failing to make a profit. Unfortunately, CVAs as currently constituted, make no allowance for this and both are painted as suffering the same problem, of too high a rent.

However, this view is itself outdated. A glance into the office sector shows that landlords are, in fact, more than willing to embrace changes to the marketplace, and to offer their customers what they need. From shorter terms, to flexible spaces, to broader portfolios that can cater to different businesses at different parts of their business cycles, landlords are happy to be creative, when allowed to be so.

Most landlords, if presented with a sensible restructuring plan for a business in trouble, will at least listen to proposals, provided that there is some share in the risk and reward, such as a temporary rent reduction, which rises once the tenant business turns a corner.

The “CVA” clause?

Press over the weekend has gone so far as to suggest that CVAs are being used as a tool to gain competitive advantages by reducing rents. Next has already waded into this by suggesting that it will now seek to insert clauses into its leases that, if any neighbouring unit obtains a reduction in rent by a CVA, Next’s rent will fall by the same amount.

Whether such clauses will actually be insisted on or agreed to remains to be seen, but the fact that one of the more successful retailers is viewing CVAs as a potential competition issue, shows how far away from genuine corporate rescues we may have come.

What can landlords do?

Property law and insolvency law do not sit well together and often collide (as was shown in the contentious issue of when rent should be paid as an administration expense, finally settled in the Game case of 2014) with unsatisfactory results.

CVAs are no exception, where a lease, created by deed between two parties which governs the relationship between the two, is unilaterally altered by the terms of the CVA, not just to the point of compromising the financial commitment, but also, in many cases, altering and in sometimes severely reducing the landlords’ ability to control its assets, such as a temporary removal of the right to forfeit.

There are open questions as to whether some of the more creative points in recent CVAs such as how they interact with the Landlord and Tenant Act 1954 are even legally effective.

Because of this, its very hard to see how it will be possible for landlords to “draft” their way out of CVA’s such as the insertion of more break rights. The CVA will just adapt to seek to dis-apply those provisions.

Turnover rents where the Landlord shares some of the risk with a tenant may be an option but the rise of internet shopping and the growth in physical stores being used as showrooms can make calculation of turnover difficult nor will a turnover rent remove the risk of a CVA.

Ultimately, the landlord community is going to have to show the insolvency community that they will not be taken for granted, but that given the chance to do so, they can be flexible and come up with solutions that allow struggling businesses the time they need to restructure and return to profit.