Millar McCall Wylie Property Partner, Simon Fleming, explains some of the issues which arise out of the implementation of Company Voluntary Arrangements in the second part of a two part series. First part available here.
There has been much focus on Company Voluntary Agreements, particularly by retailers as they face significant pressure in the current economic climate. This has arisen for many big household names such as House of Fraser, Carpet Right, Mothercare, New Look, Monsoon, Paper Chase, Homebase.
But are Company Voluntary Agreements a help or a hindrance for Landlords?
As the main creditors, it is generally landlords who find themselves in the position of needing to approve a CVA and landlords, in turn, who will suffer loss of rent resulting from Company Voluntary Agreements. Unlike in an insolvency process where unsecured creditors get treated equally, each receiving the same haircut, not all landlords are treated in the same way by the CVA process.
A CVA can propose that some over rented leases are terminated. However, other landlords are merely subject to a proposed rental cut or may not be required to take any rental discount. Furthermore, a CVA can also cover matters other than rent, and can seek to amend the covenants in a lease or remove a landlord’s right to forfeit a lease or its right to dilapidations.
Consequently, the CVA process has been heavily criticised by landlords as a way for a failing businesses to pass on its liabilities to its landlords. At first blush, landlords would seem to have good reason to reject CVA proposals. However, in practical terms, landlords often feel that they have little option but to approve the terms of a CVA. If the CVA is rejected this could prove a pyrrhic victory if the retailer becomes insolvent, leaving the landlord to deal with a vacant unit with resulting rates and service charge/insurance shortfalls to pick up.
Options for a Landlord
Is there anything a landlord can do to prevent having a CVA being imposed against its will?
- Landlords may club together to seek favourable terms with the retailer in advance of the formal CVA proposal. This is becoming particularly common, most notably in circumstances where a national retailer has a small number of institutional landlords who could potentially wield 25% of the voting power. By acting together, the landlords may have a greater bargaining power to get a better offer from the retailer;
- A landlord will have a period of 60 days to reject the CVA and can terminate the lease by serving notice on the retailer. This can be an attractive option for landlords confident that they can re-let their premises to a third party on improved terms. Recently such notice was served on clothing shop New Look as part of its CVA process, where the some of the landlords were able to find alternative tenants.
- Landlords may challenge a CVA on the basis that it has been unfairly prejudiced. Unfairness may be assessed by a vertical comparison with how the creditors would be treated on a winding up or on a horizontal comparison with other creditors. Whilst the Courts may well be prepared to find unfair prejudice if a CVA fails the vertical test, a failure of the horizontal test is much more problematic for landlords. The fact that a particular landlord has received more prejudicial treatment than another landlord will not in itself be sufficient if the company can convince the Court than in order to survive, it needed to deal with landlords on differing terms and landlords are often unwilling to litigate given the inherent costs and uncertainty.
There are a limited range of options for landlords, depending on the circumstances of the Lease and the terms of the CVA proposals. If you are unsure how you should proceed, it is always best to seek advice, to help determine option represents the most appropriate course of action.
For more information or to contact us at Millar McCall Wylie, visit: https://www.mmwlegal.com/