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01 Jul 2019

CVAs – What you need to know when your tenant proposes a CVA

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There have been a wave of CVAs recently; Debenhams, Arcadia, Homebase, Outdoor Concepts to name a few. So what do you need to do when the CVA proposal hits?

What are CVAs (Company Voluntary Arrangements)?

They are “statutory contracts” which means that whether or not you vote in favour, or vote at all, you are bound by their terms if you are entitled to vote and the CVA is passed. Voting against the CVA, or abstaining, won’t stop you being bound.

The purpose of a CVA is to rescue companies that otherwise would go into insolvency and CVA proposals will always include details of how you would be worse off with an administration or liquidation. Inevitably, CVAs are used to close stores that are underperforming or ‘over rented’ or to impose rent reductions on some landlords.

CVAs cannot extend a contracted out lease beyond its fixed term.

What should I do when I receive a proposal?

You should find where your property is in the schedules to identify which category your property has been placed within. You should then read the section that details the effect on the contractual terms. It will inevitably mean a switch to monthly rent for the duration of the CVA but it will also set out if the rent is to be reduced. If the rent is reduced you should get the right to serve a break notice to terminate the lease. Other important things to look out for are the effect on dilapidations and the effect on guarantors and other terms.

Do remember to vote. In the case of Arcadia, the landlords were able to extract more advantageous terms by voting against the CVA in sufficient numbers. It is worth noting that the CVAs often have special rules regarding valuing your claim and if you follow these (by submitting a Notice of Claim in the correct format) you can get your claim valued at a higher amount, giving your vote greater weight. The CVA supervisor has discretion over the calculation method, but it has become normal to allow landlords to include a percentage of future losses under the CVA, in addition to arrears to date.

The CVA papers will include the Notice of Claim for voting purposes and Proxy Form if you are not attending the Creditors meeting in person. These need to be returned on time. The firm making the CVA proposal should be able to provide you with their calculation of your claim which you should check and ask them to correct if the details are wrong. Do also take care to ensure that the person signing the forms (the Proxy Form in particular) is properly authorised by the property owning company to do so.  If questioned you need to be able to prove that you are duly authorised.

What if CVA documents are wrong?

It is quite clear that CVAs are not drafted by property lawyers and there are usually various uncertainties in the detailed terms. These should be raised with the firm making the proposal to explain and, if needs be, to correct the drafting. It is in everyone’s interest that, if approved, the CVA actually works and does not leave you in limbo.

The Stephenson Harwood team have in the past managed to get properties moved between categories where it can be objectively justified. The amount of influence you can exert will depend on how close the vote is likely to be and how much they need your vote.

There are inconsistencies between property law and the law relating to CVAs but the system works in practice by CVA supervisors abiding by the spirit of the terms and not taking technical points. If that changes, expect some interesting court cases.

Should I get together with other landlords to agree how to vote?

If you vote as a block you may potentially be able to exert sufficient influence to improve the terms for landlords or even block the CVA altogether. However every case is different and sometimes landlords are happy to get the property back or simply to improve the terms. It’s always worth staying well connected and being aware of the approach that other landlords are likely to take.

What if I vote against but the CVA passes?

You can challenge a CVA within 28 days on the basis of material procedural irregularity or that it unfairly prejudices the interests of a creditor (or class of creditors).

It is reported that Sports Direct and others are challenging the Debenhams CVA. Challenging a CVA will require a swift review and compiling evidence to prove the ground for challenge. Whilst the challenge procedure has not been used that much to date, it’s a valuable protection available to landlords that should be considered.

Are there any protections left for landlords in the lease?

There is no automatic moratorium where a CVA is proposed unless it’s a small company and so until the CVA is approved you can pursue any relevant remedy. So if you have a right to forfeit for a current breach you can still do that (subject to the right for the tenant to seek relief). After the CVA is approved you are bound by the terms of the CVA.  Invariably these vary the lease to remove any right to forfeit based on entry into the CVA, but you can still forfeit for other breaches.

Morals

CVAs are sweeping across the retail landscape at the moment. Landlords have no choice but to remain vigilant and if proposals don’t add up be prepared to take a stand.  

  • Look out for reports of CVAs affecting your properties and make sure you get the proposals
  • Read the proposals to see how they affect you
  • Keep up to date on your tenants and the marketability of your properties: how much does the tenant want to keep the property and can you get moved into a more favourable category by threatening to exercise the break right in the CVA?
  • Be prepared to ask questions if the drafting doesn’t make sense and ask for changes if the facts or terms are wrong
  • Be prepared to challenge CVAs in appropriate cases. CVAs are a fact of life at the moment but there are protections in place.

The Stephenson Harwood team have considerable experience of advising landlords in connection with CVAs and can be relied upon to provide swift and commercial advice. For more details please contact Andrew Myers or Sophie Schultz or your usual contact at Stephenson Harwood.

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