The recent JJB Sports administration highlighted another potential consideration for landlords – namely, the wisdom of company voluntary arrangements (CVAs). JJB went through two failed CVAs prior to going into administration in September.
A CVA is a 'consensual' arrangement voted for by 75% of a company's creditors with the intention of returning an ailing business to profitability. For landlords, CVAs will often involve changing the terms of leases – for example, providing that rent is payable monthly rather than quarterly, or in arrears. Landlords of unprofitable units may be invited to accept a share of a pot of money set aside to part compensate them in return for a release of future obligations under their leases.
Unless tenants are in arrears at the date that a CVA is proposed, there may be little that landlords can do to prevent proposals being voted through. Although tenants often have significant contingent liability under their leases, the chairman of a CVA has discretion as to whether to consider this contingent debt for voting purposes, and generally this contingent claim will be valued at a nominal sum, carrying insignificant voting rights.
Nevertheless, where a CVA is proposed there may be a number of issues for landlords to consider as an alternative simply to going along with other creditors.
- If a tenant is in arrears of rent, or in breach of other lease covenants, it may be possible to forfeit the lease prior to a CVA being voted through. The two failed JJB CVAs demonstrated that it would have been far better for certain landlords to take back premises than to allow an ailing business to limp on.
- Even where landlords of failing stores have little option but to accept a compromise in respect of contingent rent liability under a CVA, great care must be taken that any subsequent surrender arrangement does not have the effect of reducing its entitlement even to this sum.
- Even where a landlord is unlikely to influence or challenge a CVA proposal on an individual basis, there may be merit in joining with other creditors to influence a result.
- There is considerable strength of feeling in the industry that landlords are being unfairly singled out in comparison to other types of creditors. There may be increasing appetite to investigate whether CVA that binds a landlord creditor even if it votes against its terms might be challenged on the grounds of unfair prejudice or material irregularity.