Commercial Rent Arrears? Our Best Advice for a Company Voluntary Arrangement (CVA)

A Company can pay an outstanding debt at a reduced level, or over a longer period of time, by agreeing to enter into a Company Voluntary Arrangement (CVA).

Commercial Landlords must be prepared and know how to deal with financially distressed tenants, as we see the retail industry traditionally vulnerable in challenging economic times.

The background

According to the Financial Times, “recent high-profile CVA cases have allowed retailers such as New Look, CarpetRight and Mothercare to impose rent reductions on Commercial Landlords and to break leases to close some stores altogether, in order to avoid insolvency”.

It is important that Commercial Landlords are aware that once approved a CVA will bind all unsecured creditors, regardless of whether they voted for or against the CVA and whether or not they attended the meeting.

Beware

As a Commercial Landlord, agreeing to a tenant in arrears entering into a CVA may seem tempting. You should consider the following:

• If you object to the CVA (which you have a right to do) and they then become bankrupt as a result, you may receive less money from the bankruptcy than the CVA.
• You may also consider that at least the Business Rates will continue to be paid by the Tenant.
• According from figures released by KPMG, statistics show that since 2008, the majority of retailers who have entered into a CVA (such as BHS, Woolworths, Focus DIY and Toys R Us) have become bankrupt anyway, and it is the Landlord who has lost out in the end.

The CVA, in some cases, can allow the Debtor to duck out of the lease altogether. The Debtor can be allowed amendments, made to particular covenants in a lease. More controversial proposals can include:

• seeking to remove a Landlord’s right to forfeit a lease
• depriving them of valuable guarantee rights which they might have against a solvent parent company or third party
• enforcing a rent reduction on you that you will not have agreed to.

As a Commercial Landlord you would be directly affected by any enforced rent reductions, unlike other creditors the tenant may have (who may vote in favour of a CVA). Criticism has been evident, stating that a CVA can be particularly unfair to Commercial Landlords. Furthermore, Enforcement Agents (Bailiffs) and winding up petitions cannot be instigated once a CVA has been agreed. At that point of agreement, all legal action is stayed.

That said, you do of course then have the legal right to re-let the premises to someone willing to pay a higher rent, but this is not always an easy task with the decline of the high street, due to online shopping.

Summary

In summary, Commercial Landlords should be mindful of the effect that the terms of a CVA proposed by a tenant might have for them. The Landlord should consider and participate in the approval process for the CVA and fully exercise their rights to make representations and vote. This will help them achieve the best outcome.