Company Voluntary Arrangements (CVAs) – an update for landlords
Useful tool or most reviled scheme?
CVAs proposed by companies under Part 1 of the Insolvency Act 1986 have been the subject of increasing use and mixed press over recent months culminating in the controversial CVA proposed by New Look which is the subject of an ongoing challenge by some landlords.
A company uses a CVA to propose an arrangement with unsecured creditors to compromise debts and liabilities. If 75% (in value) of unsecured creditors approve the CVA all unsecured creditors are bound unless more than 50% are ‘connected’ to the company.
A CVA must produce a better outcome for creditors than would be achieved in administration or liquidation. No creditor, by reference to the treatment of all creditors in the proposed CVA, should be unfairly prejudiced (although it is possible to treat creditors differently in a CVA).
A CVA is only suitable where there is a viable long term business. The former ‘small companies’ moratorium has now been repealed. Instead the Corporate Insolvency and Governance Act 2020 (CIGA) introduced a new moratorium procedure to provide a short breathing space for companies with a viable future. Provided the criteria in CIGA are met, this procedure can be extended out to cover the period for the CVA proposal to be made and for the meetings of members and creditors to be held. During this moratorium landlords may not apply for leave to forfeit. However, the company does have to make payments of commercial rent during the moratorium period (but not arrears).
Terms proposed affecting landlords
A CVA can propose a reduction in future rent and include dilapidations [Discovery (Northampton) Limited v Debenhams Plc . A challenge to such proposals as being unfairly prejudicial may not succeed where expert evidence is accepted by the court as demonstrating that premises have been ‘over-rented’. It is likely that courts would take a different view where rent reductions are proposed to premises where the rent payable is at market value.
New Look’s CVA proposed a change to the terms of the leases over all its stores (c. 400) from annual rents based on value to turnover rents. The CVA was approved. Certain of the affected landlords have mounted a challenge to the CVA on the grounds of unfair prejudice under Section 6 of the Insolvency Act 1986. Whilst turnover rents are popular with tenants (seeking to share the drop in turnover caused by the COVID-19 pandemic with the landlords) they are unpopular with the landlords for obvious reasons despite the insertion of landlord break clauses into the proposed changes by way of mitigation.
A CVA cannot abrogate landlords’ proprietary rights to forfeit by reason of an insolvency event. A well drafted commercial lease will contain landlord rights to forfeit upon the tenant becoming insolvent and / or entering into an insolvency procedure (including a CVA) [Debenhams Retail Limited ].
A CVA cannot be used to force a landlord to accept a surrender of a lease [Re Instant Cash Loans Limited ].
A CVA proposal which purports to remove or extinguish the liabilities of guarantors is unfairly prejudicial to landlords [see Powerhouse and Miss Sixty CVAs] and so is not permitted.
We suggest landlords, on receipt of a CVA proposal from a tenant:
- take immediate legal advice on the proposals and landlord options;
- consider carefully the proposals against the lease terms and consider whether the proposals are unfairly prejudicial;
- consider serving a notice pursuant to section 146 LPA 1925 and what notice period should be given against the consequences of serving the notice and having empty premises (assuming no application for relief is made);
- make sure proprietary rights are not waived: voting (whether for or against a proposal) on a CVA could amount to affirmation of the continuing lease;
- don’t take any action without considering the impact on any surety: the discharge or release of the principal will discharge or release the surety. A variation to the lease without the consent of the surety or where the alteration is substantial and prejudicial to the surety will release the surety;
- make sure your claim is properly submitted and that you are permitted to vote for the correct value at the meeting of creditors; and
- don’t ignore the communications and proposals and do nothing!