The Retail Gazette reported earlier this year that the number of retail Company Voluntary Arrangements (“CVA’s”) increased seven fold in 2018 when compared with the previous year and this trend looks set to continue. With big named retailers such as Debenhams and Monsoon affected by plummeting high street retail figures it’s likely that Landlords across the board will feel the impact of CVA’s across their portfolios.
What is a CVA?
A company voluntary arrangement (CVA) is a mechanism that allows a company:
- To settle its unsecured debts by paying only a proportion of the amount that it owes to its creditors.
- To come to an arrangement with its creditors over the payment of its debts
It is usually initiated by a company nominating an insolvency practitioner (or, “nominee”) to oversee the CVA’s implementation. Under the terms of the CVA, the nominee can recommend that the company restructures its rent obligations and thereby improve its financial position and (broadly speaking) if approved by 75% of the company’s creditors then the proposal will be implemented and will bind all creditors who are entitled to vote in the decision process (even if they dissent with the proposal).
How does it affect Landlords?
The proposal will likely include a negative variation on rents (e.g. peppercorn rents) or lease terms less favourable to Landlords. Furthermore, once a CVA is implemented a Landlord cannot exercise forfeiture under the terms of the lease or take any legal action to recover unpaid rent under the commercial rent arrears recovery procedure. The matter is out of your hands until the company comes out of the CVA or is formally wound up by a liquidator and the lease will likely be disclaimed.
What can you do?
We have compiled the following list as a guide for Landlords who want to be proactive:
- Have the conversation with the Tenant as early as possible if you feel that they may be in financial difficulties. The tell-tale signs of late or missing rent payments or the building falling into disrepair are key indicators that something may be amiss. That way you may be able to agree a restructuring deal ahead of the CVA implementation and one that is more favourable to you than would be offered under the CVA.
- Try to approach the matter in a collaborative way – sometimes taking the hard line benefits no one as the tenant’s business fails and you are left with an under-rented (or empty) property and probable liability for business rates. If you have a good relationship with the Tenant then think of it as an opportunity to use this as a joint venture to support the tenant at a difficult time with payback delayed until the tenant gets back on their feet. Prettys can offer round table mediation services as part of our Talking Works initiative which has been proven to resolve disputes through discussion at an early stage, thereby reducing costs and providing a solution in a faster time frame.
- Consider being flexible in your approach to lease terms – by allowing sharing of occupation through concession agreements or subletting of part you offer the Tenant an alternative revenue stream to allow them to continue operating from that site. This would also sit hand-in–hand with more flexible user clauses. Allowing the Tenant more flexibility to advertise and promote their goods would also help so consider varying those provisions in the lease. Also, by agreeing to a Tenant’s break clause you have control over when the property might be coming back to you and can plan accordingly.
- The obvious point is to consider reducing the rent; but by considering varying the lease to include turnover rent provisions (with no minimum increase) you care share in your tenant’s success once they come out the other side. You could also consider reducing the rent and increasing it in “steps” over a number of years if you want more certainty.
These variations may seem like significant changes and less favourable than current terms but many landlords value the greater degree of control and certainty that comes with agreeing these matters voluntarily with the Tenant ahead of a CVA.
Prettys Commercial Property Team have significant expertise in advising both Landlords and Tenants on re-structuring lease agreements and can facilitate round table mediation through trained mediators. If you would like to discuss re-gearing leases with us (or any other commercial property matter) then please contact CommProp@prettys.co.uk or call 01473 298250 and speak with Rebecca Cleal, Senior Associate.
