WHEN A CVA MIGHT BE THE LEAST WORST OPTION

In the continuing stormy waters which are battering the retail sector, many firms are seeking calmer waters through the use of company voluntary agreements, or CVAs.  These can buy a retailer some breathing space from its current debts to restructure and emerge stronger. CVAs have to be approved by 75 per cent of a company’s unsecured creditors; once this happens, the terms of the CVA become binding on all creditors, including any which voted against the proposal. 

For many creditors, however, the prospect of recovering at least a proportion of what they are owed, albeit quite possibly over an extended period of time, is more attractive than watching the debtor firm sink into administration, which in many cases will see unsecured creditors receiving nothing.

For commercial landlords, however, CVAs can seem like a raw deal.  Whereas other creditors face relinquishing a proportion of accrued debts, landlords can also face a reduction in rental income – as well as other contractual rights – into the future: reduced future rental levels, severe limitation on dilapidation claims, and even the removal of the right to regain possession of premises in the event of future rent arrears.

That is not to say that landlords should automatically oppose CVAs; that will depend on market conditions and whether premises are likely to be re-let to another tenant at a strong rent should the tenant business fail. 

But with future as well as past income at stake, landlords need to tread carefully, as their ability to challenge a CVA through the courts is limited, and depends on them being able to demonstrate that the terms of the CVA ‘unfairly prejudice’ their position.

With CVAs increasingly being used in the retail sector, commercial retail landlords need to be vigilant.  Most importantly, they need to keep a close eye on their tenants’ business performance, so that measures such as updated dilapidation schedules or even in extreme circumstances, taking steps to recover the premises before a CVA is proposed, can be actioned if necessary.  At the very least, regular management inspections should be on the agenda.

If a CVA is proposed, landlords must act quickly – normally you only have 14 days before the creditors’ meeting, and only 28 days after that to challenge a CVA for ‘unfair prejudice’.  Landlords must make sure they submit as high a claim as possible to the CVA, supported by expert evidence.

CVAs are not always the worst solution, and the opportunity to see a tenant – especially a good tenant – remain in place, albeit at a reduced rent, could be the best option when the alternative might be a long void period or having to accept an inferior lease from an alternative occupier.