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CVAs: a lifeline for retailers but a challenge for landlords says Alan Herbert, Partner, DWF.
R
etail tenant insolvency is on the increase and the number of businesses that have sought to reduce their rents by using a Company Voluntary Arrangement
(CVA) has risen in the past year. We currently have a rent quarter day
approaching us – 25th December 2011 - and the groups representing the retail industry are making gloomy predictions about how many retailers will survive this, bringing into sharp focus how landlords have to manage their portfolio pro-actively to lessen the consequences of retailer insolvency. A CVA is legal procedure that businesses can use to deal with
debts and payments that they can’t meet. The arrangement is a proposal by the tenant, to its creditors, of how much it intends to pay off from existing debts, what proportion of future rents it is willing to meet and how long this concession will last. This all depends on what the company can afford. In short, a CVA is a method to protect a business from its creditors when it has cashflow difficulties and cannot pay its debts. CVAs were a creation of the 1980s enterprise culture, intended
to encourage entrepreneurs to set up businesses and to reduce the risk of failure by providing mechanisms to keep businesses afloat in difficult times. Provided that 75 per cent of the creditors (by value) agree to the CVA, then all creditors, including landlords, are bound by it and their full entitlement is reduced accordingly. Whilst the legislation was aimed at entrepreneurs, in reality, all
companies - large and small - can, and have, made use of CVAs. Recent examples of larger established retailers using this law include JJB Sports, Blacks Leisure and Focus DIY.
ConsequenCes for LandLords Landlords face being brought into a scheme that may well significantly reduce their income with no guarantees that the tenant’s business will survive. Post 2009 however, CVAs have tried to be more beneficial
to landlords. This is since the Yorkshire business, Stylo, had difficulties and sought to save its stores and employees by implementing a CVA. The landlords successfully voted it down as they felt the concessions wanted by the company were too much for them to bear. These terms included going from paying the fixed rents set under the leases to a percentage turnover rent, and an
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ability to terminate leases that were not successful within six months. It is therefore worth bearing in mind that CVAs can be challenged by landlords. In some cases however, landlords may
not even realise there is a CVA in place, as a creditor can be bound by CVAs even if it was not present at the creditors meeting when the arrangement was agreed. Landlords therefore need to be cautious, and as soon as they realise that a retailer is in, or going into, arrears then it needs to open a dialogue with the company so that it is not caught out.
When it comes down to it, CVAs present a difficult dilemma for
landlords - in some cases, the landlord is put in an almost impossible decision of either going along with a CVA and trying to use its influence to achieve the best outcome, or dealing with how the administration or liquidation of its company will impact it. Landlords will need to be mindful of their own cashflow position: how rents to superior landlords will be paid, how will maintenance programmes be funded if services charges are not paid, empty rate liability if possession is taken back and will it breach its lending covenants by agreeing to a CVA. In that respect, landlords need to assess the situation on an individual basis, and whether what is on offer through the CVA is realistically the best it can recover. If not, then the landlord needs to try to ensure that the arrangement is not approved, which might lead the tenant into administration and mean that the landlord may not receive any income at all if the store is unsuccessful and the business has no value.
What’s to Come? Whether the number of CVAs will continue to increase is debatable. A recent survey of 547 agreements that started in 2006 showed that only 14 per cent have survived trading and have come out of them. Landlords therefore need to consider the full picture before agreeing to one, this includes claims against prior tenants, guarantors, using rent deposits, the consequences if there is no framework in place, and also the real loss if the retailer goes into administration or liquidation despite the CVA being used.
Alan Herbert, Partner, Real Estate Litigation, DWF LLP.
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