CVA A-OK? Landlords have more leverage than they think
Arcadia, Paperchase, Select, New Look, Cotswold Outdoor and many more have chosen to use the strategy to help avoid liquidation, restructure their company’s debts and as a beneficial side benefit, reduce essential outgoings such as rent.
Close to 20% of all CVAs are now retail companies and since 2017 the number of retailers entering into CVAs was up by 52%.
Yes, experts will continue to say that “CVAs should not be used as a tool for financial engineering and a way to walk away from freely entered-into legal contracts. Their use must only be as a last resort” but as you might have noticed, this season the brazen look is in and well, people have had enough of experts haven’t they?
There’s still one group of experts in the UK with a definitive view on how CVAs should be used and we should really pay attention to what they have to say – Judges.
Retailers and other companies will try all sorts of esoteric wheezes to reduce their outgoings and for some the CVA is nothing more than the means du jour to do it, but there are rules and precedents that have to be followed like any other legal process.
One is how fair they are to landlords and guarantors.
Back in 2006, A high-street electrical goods retailer called Powerhouse went into administration and proposed a CVA to close some of its loss making stores.
Under the terms of the proposal, landlords would be paid a certain amount of compensation and Powerhouse would be released from its liabilities to them and crucially, its parent company – Pacific Retail Group Limited (PRG) – would be released from all guarantees it had given. All the other creditors would be paid in full.
The landlords objected but because a CVA doesn’t require unanimous approval, only 75% of the company’s creditors present and voting at the creditors meeting is required which duly occurred and the proposal was passed at the meeting in February 2006.
The landlords then got together and decided to challenge the CVA on the basis that is was unfair to them because it was approved on the votes of creditors who were getting fully compensated and that the legislation (The Insolvency Act 1986) doesn’t permit this.
The court found that the CVA effectively released PRG from their guarantees and that as a result it was unfairly prejudicial to the landlords’ interests.
The ramifications of the decision are still relevant today and any company considering a CVA as a way to escape guarantees should think on.
Courts won’t allow a CVA to be used as a mechanism to strip away guarantees but there could still be other arrangements made so landlords are not unfairly treated. Some switched to taking rent deposits from their tenants, regularly topped up, in lieu of a formal guarantee.
It also enshrines the principal that different parties have to be treated appropriately in a CVA. The landlords in the case would have been disadvantaged compared to the unsecured creditors so therefore should have been given greater consideration.
CVAs cut both ways
Landlords do hold some cards in a CVA scenario.
Not every company wants to enter a CVA so if there is the chance to strike a deal before one is imposed then it might be advantageous. A CVA would override any alternative arrangements made but giving some leeway through concessions earlier might be the difference between having a rent reduction imposed for two to five years and not.
When a CVA is put in place the company’s leases are divided into three categories:
- Group A – profitable stores – these leases are left as they are
- Group B – marginal stores – these are eligible for renegotiation of the leases including large rent reductions
- Group C – unprofitable stores – these are closed and the premises returned usually with an agreement for compensation
Making concessions on rent in advance of a CVA could allow some stores to be classed as Group A rather and immune from formal rent reductions.
A landlord can also take back their premises early. The implementation of a CVA is grounds for forfeiture in many leases and it might be more advantageous to get a new tenant paying full rent or dispose of the property rather than take the reduced rent a CVA will bring.
If a CVA fails and the company enters administration then the Landlord is no longer bound by the terms of the agreement and can demand the full rent due for the period rather than the reduced amount set in the CVA. As a creditor, there is no guarantee this would be recovered in its entirety but will increase the amount due to the landlord as a creditor.
A CVA is not a magic pill that will cure all financial ills either for the company in distress or the landlord of the properties they inhabit.
If you’re a landlord whose tenant has mentioned those three little letters or you’re a business considering it as a way forward – talk to us first.
A free initial consultation with one of our expert team can help you make the right decision for you and your business based on your unique circumstances – not the cheapest option or the one that’s in all the media.