27 June, 2019
Entering into a CVA appears to be a current fashion trend amongst retailers. Although they can serve as an important rescue remedy for struggling companies, the impact on landlords is unique from any other creditor which can lead to unexpected consequences.
Landlords of the hairdresser chain Regis have pulled together to challenge its CVA in the hope of redressing this balance.
Sports Direct (as landlord) have recently sought to challenge the Debenhams CVA plans.
What is a CVA?
A CVA (Company Voluntary Arrangement) is a formal arrangement between a company and its creditors in relation to its debt. It is flexible and allows a company to agree to differing payment terms. In order for a CVA to be approved, 75% of the creditors (by value) need to agree to the proposal.
Struggling retailers may find a CVA a useful tool in a downturn when stuck with rents set many years ago on upward-only reviews. Tenants of multiple units find the process much easier than renegotiating several lease agreements individually.
For most creditors, a CVA is much more attractive than other forms of insolvency as it usually involves some payment towards the debt.
How does this impact landlords?
A CVA can unilaterally amend a lease. It can reduce the rent payable either temporarily or permanently. It can allow a tenant to break their lease early or even assign part of the premises. It can forgive a serious breach. All this while leaving the landlord powerless to forfeit.
Often when a CVA proposal is drafted, there are no rent arrears, leaving the landlord with little voting rights.
What can landlords do to protect themselves?
If your tenant seems to be struggling with a high rent - be willing to negotiate before a CVA is proposed. A CVA is a costly mechanism for a tenant. The money saved from the formal procedure can mean a better deal for both parties, and has the added advantage of remaining private.
My tenant has entered into a CVA, what are my next steps?
Once the CVA has been approved you should take specific legal advice immediately. All CVAs are different, and the first step is to take advice as to how the CVA impacts you as landlord - all may not be as bleak as it first seems. If you are stuck with a bad deal you must act fast to challenge it.
There are two ways to challenge a CVA- material irregularity or unfair prejudice. Material irregularity is where a creditor can show the proposal undervalued a claim or the company has undervalued assets which would affect the voting rights. In Regis's case, it was accused of selling assets for nominal amounts shortly before proposing the CVA.
A landlord may be successful with an unfair prejudice claim if it can show the result of the CVA to you is worse than another similar creditor, or worse than liquidation. Any challenge must be issued within 28 days of the CVA being approved.
For more information contact Laura Hallett Lea in our Dispute Resolution department via email or phone on 0333 207 1141. Alternatively send any question through to Forbes Solicitors via our online Contact Form.