Company voluntary arrangements (CVAs) have come under scrutiny recently, after a number of high profile CVA proposals (including Debenhams and New Look) were challenged by commercial landlords. The commercial property sector has raised significant concerns regarding the use of CVAs and their impact on commercial landlords; including the way in which CVAs calculate and compromise rent debts, and modify terms of leases.
These concerns have resulted in the Insolvency Service commissioning a research report (the Report) to gather evidence and analyse the consequences that CVAs have on landlords within the retail, accommodation, and food & beverage sectors, and to consider if CVAs are unfairly prejudicial to commercial landlords in comparison to other classes of creditors. The Report was published recently and can be accessed here.
CVAs and landlords’ concerns
A CVA is a statutory mechanism that allows a company to settle its unsecured debts by paying only a proportion of the amount that it owes to its creditors and to come to an arrangement with its creditors over the payment of its debts.
A CVA proposal will be implemented if it is approved by at least 75% (by value) of the company’s creditors, unless more than 50% (by value) of any creditors who vote against it are unconnected with the company. Once approved a CVA binds both known and unknown creditors.
If a commercial tenant enters into a CVA, there is a risk that the landlord might be forced to receive a reduced rent and, potentially (in the case of retail tenants) closure of unprofitable stores or units. Rent and other liabilities can be reduced under a CVA even if the tenant continues to trade from the premises.
If a landlord feels the CVA is detrimental to its interests, it can apply to court on the basis that the CVA unfairly prejudices its interests as a creditor, or the CVA itself has a material irregularity. Having said that the courts have held that treating landlords differently to other trade suppliers/creditors, does not equate to unfair prejudice.
A CVA cannot vary or remove a landlord’s right to forfeit a lease. If the tenant has committed a breach of the lease that allows the landlord to forfeit (and this could actually include entering into the CVA itself or closing the premises), the landlord might be able to forfeit the lease. The tenant is able to apply for relief from forfeiture, but whether that would be granted is subject to conditions, and would turn on the facts of each case.
The report: key findings
The Report is based on a sample of 59 CVA proposals and seeks to answer three key questions, focused around how landlords are treated when a company enters into a CVA.
Q1 – How do outcomes for landlords in large business CVAs from the retail trade, accommodation, or food & beverage service activity compare to other creditors?
- In 93% of CVAs within the sample, the Report found that at least some landlords’ claims were compromised. This is compared with the next highest single class compromised, being intercompany creditors at 51%.
- The average level of compromise for all landlords was found to be 43%. That compares with the average level of compromise given to other key creditor class such as intercompany creditors (48%), local authorities (39%), and HMRC (23%).
- The Report does recognise that the level of compromise for landlords may be understated, as there are often additional debts which landlords compromise (e.g. rent arrears , service charges, and dilapidations were not researched for this report, due to the difficulty in obtaining data for the same).
Q2 – Are landlords equitably treated, compared to other creditors, in large business CVAs from the retail, accommodation, or food & beverage service activity?
- The Report concludes that landlords are broadly treated equitably compared to other classes of unsecured creditors.
- The requirement for a nominee, who is a licenced insolvency practitioner, to provide an independent opinion together with the fact that creditors are given the opportunity to vote on proposals, together with creditors’ ability to propose modifications to the proposals, are all noted in the Report as key checks and balances in the CVA process.
- The Report mentions that recent high profile legal challenges to CVAs brought by commercial landlords do not necessarily mean that landlords are inherently discriminated by the CVA process. Moreover, the Report found that whilst it is open to landlords to challenge CVA proposals in Court, there are significant cost consequences for doing so.
- The proportion of creditors agreeing to the CVA proposals reviewed by the Report is found by the Report to be generally 85% or more in value of those voting, suggesting that landlords (who generally accounted for a large proportion of the voting rights in the sample) probably offer their support to CVAs.
Q3 – If such a finding is made, to identify what specific levers in the framework are causing the issue and how.
- The Report finds that one of the key criticisms of the CVA process is the general length and clarity of CVA proposals (which will not be surprising to those who come across such proposals on a regular basis). Many of the proposals in the sample were found to be legalistic, lengthy, repetitive, and lacking clarity.
- A lack of consultation with key stakeholders was also identified as an area for improvement. The Report suggests an update to the formal Statement of Insolvency Practice relating to CVAs (SIP 3.2), to include consultation with the British Property Federation, on behalf of their members (mainly landlords), prior to launch of a CVA proposal, if the CVA seeks to compromise a landlord’s claim and meets certain criteria. The outcome of that consultation would then be included in the CVA proposal.
Conclusion
Despite the concerns within the commercial property sector which lead to the Report being produced, the Report concludes that landlords are in fact, broadly, equitably treated in CVAs compared to other classes of unsecured creditors. The Report also makes a number of suggestions which, if adopted, may afford greater clarity and understanding among CVA stakeholders.
The Report also comments on the fact that CVAs generally offer a flexible and cost-effective solution that bridges the gap between informal negotiations and formal insolvency procedures such as administration / liquidation.
CVAs enable companies to implement a legally binding financial restructuring quickly and efficiently, providing an increased chance for the business to survive as a going concern. Despite the areas for improvement, CVAs are undeniably a key tool available for companies in financial difficulty seeking to restructure.
That said, commercial landlords may feel disappointed with the Report’s conclusions, and will consider this to be yet another obstacle to overcome in what they may feel has been a very anti-landlord climate over the past couple of years. Following, for the most part, lifting of coronavirus-related restrictions, commercial landlords may feel the Report’s findings to be a step back again.