In this first part of a two part exclusive series, Millar McCall Wylie Property Partner, Simon Fleming, explains some of the issues which arise out of the implementation of a Company Voluntary Arrangement. The second part of the series is available here.
Retailers have been under significant pressure for several years due to a perfect storm of adverse trading conditions. A combination of unfavourable economic condition arising out of the financial crash and the 2016 Brexit Referendum, together with the long-term issues arising out of competition from online sellers, has led to a reduced footfall on the High Street.
Historically retailers often favoured long term leases which provided them with security of tenure and commercial certainty, and as a matter of course these leases contained upwards only rent reviews. Following the financial crash 10 years ago, many retailers were left paying rents well above open market and have been forced to consider how to operate in these circumstances. This has led to many household names such as House of Fraser, Carpet Right, Mothercare, New Look, Monsoon, Paper Chase, Homebase entering into a Company Voluntary Arrangement.
The Company Voluntary Arrangement process allows the retailer to reach an informal but binding compromise with its unsecured creditors. This is an attractive option for the following reasons:
- The shareholders and Directors of the retailer are able to retain control;
- No court approval is required and therefore, as well as being more straightforward, the process avoids the stigma of potential sanctions that come with administration or liquidation; and
- It offers a flexible process in that creditors can be treated differently depending on circumstances. Unlike in an insolvency process where unsecured creditors get treated in a uniform manner, each receiving the same haircut, not all landlords are treated equally in a 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 asked to take any rental discount.
To come into effect, a CVA must obtain the approval of 75% of creditors in value, including at least 50% in value of unconnected unsecured creditors. Once approved (and subject to limited circumstances in which a challenge can be made), a CVA will bind all unsecured creditors regardless of whether they voted for or against the CVA and whether or not they attended the meeting. No unsecured creditor can take any step against the company to recover any debt that falls due within the scope of the CVA, once it is effective.
Can a CVA be Justified?
From a landlord’s perspective, the Company Voluntary Arrangement process seems manifestly unfair as a tenant can dilute the contractual obligations it signed up to as part of its lease, whilst landlords are not treated uniformly.
However, a retailer’s perspective is very different:
- Retailers can justifiably point to the manifest unfairness of business rates which places the High Street retailer at a significant disadvantage to its online competitors and the failure of successive governments (at national or local level) to create a more level field and/or take any meaningful steps to stimulate the High Street by reforming the commercial rates system;
- Many issues arise out of landlord’s insistence for upwards only rent reviews in commercial leases within Northern Ireland (and the UK) whereby the Landlord is asking the retailer to take all the risk of a falling market. Should landlords not take some of the risk by accepting rent reviews not calculated on an upwards only basis term? This was certainly the view of Dail Eireann which outlawed upwards only reviews in the Republic of Ireland in 2009.
Is there a future for CVAs?
As lease terms get shorter and new leases are put in place post economic crash, it may well be that in the longer term, CVAs will return to being a relatively obscure arrangement in the context of landlord and tenant law. But for now, it is unlikely that we have seen the last of this mechanism or the many issues which arise out of these arrangements. Watch this space!