With England starting 2021 in another national lockdown, and many businesses forced to close their doors once again, it’s likely there will be an increase in businesses entering Company Voluntary Arrangements (CVAs).
What is a CVA?
A company voluntary arrangement (CVA) provides a framework for a debtor company to reach a binding settlement with its creditors for pre-arrangement debts, often at a figure less than their full value.
The impact of CVAs for commercial landlords
The restrictions introduced as a result of COVID-19 have further highlighted the problems landlords have been facing. This is particularly true for those in the retail sector, with many of the usual remedies for recovering rent from their commercial tenants now restricted:
- An evictions ban on commercial tenants for non-payment of rent is currently in place until 30 June 2021.
- There is currently a stay on possession proceedings. Although now expired, this means landlords have to file and a reactivation notice confirming they wish to have the case in question listed, relisted, heard or referred.
- There are limitations on commercial rent arrears recovery, depending on the length of time for which rent has been unpaid.
- The presentation of statutory demands and winding-up petitions, save in certain carefully designated circumstances, is currently prohibited.
What are the options if a commercial tenant enters a CVA?
Many might consider that the above restrictions have created a charter for tenants to avoid their contractual obligations. However, where struggling businesses are building up significant rent arrears, their landlords have some important recovery options still available to them.
1. Recovery from former tenants and their guarantors, or from existing guarantors or potentially sub-tenants.
If the tenant entered a lease agreement before 1996 its landlord may be able to pursue the original / previous tenants for breaches. However, if the lease was granted on or after 1 January 1996 there are restrictions. For example, there must be an authorised guarantee agreement (AGA) in place with the previous tenant and, even then, that route can only be pursued for certain types of claim.
In addition, only the immediately preceding tenant can be pursued (not the original tenant). It is therefore worth checking carefully for the availability of former tenants and also current guarantors (e.g. parent company / director guarantees).
2. Landlords may hold a deposit
In addition to holding a deposit, subject to the contractual wording of this deposit, landlords may also be able to draw down funds or consider revisiting any other security the tenant may have provided.
3. Court proceedings
As debt claims are not prohibited, landlords can still bring proceedings in the country courts or High Court in order to recover any rent arrears. Furthermore, while statutory demands are currently restricted for use against businesses, they are not restricted for individuals or sole traders, meaning an enforcement option still remains.
While there is understandable sympathy for business that are struggling during this difficult times, the British Property Federation has made it clear that landlords are businesses too. The pension funds of millions of individuals are invested in the commercial property sector alone. Therefore it’s essential that all parties work together.
The government has published a code of practice for the commercial property sector to encourage commercial tenants and landlords to work together.
This is in addition to the RICS Commercial Rental Independent Evaluation Service, which offers support with fair and structured negotiations, helping to avoid issues ending up in court.
The Corporate Insolvency and Governance Act 2020
Rent is only one obligation that struggling businesses have – they are also likely to owe sums to suppliers, employees and HMRC. When businesses reach this level of financial difficulty they will likely seek restructuring options, with one options being the moratorium procedure introduced by the Corporate Insolvency and Governance Act 2020.
This gives viable businesses who are currently struggling some protection from court or other enforcement action, offering a period of time to reorganise their operations or seek reinvestment. It is a short-term option where existing management stays in place, but are overseen by a qualified insolvency practitioner who acts as monitor.
It remains to be seen whether this is an effective solution for struggling businesses, many of whom are currently being supported by financial relief from the chancellor in the form of the furlough scheme and financial support.
The moratorium only suspends a landlord’s rights of action for a limited time - it does not affect the general obligations of the tenant under a lease. However, these obligations may be varied by other restructuring options available, such as a CVA.
CVAs - making arrangements
Like the new moratorium, a CVA also leaves the debtor company under the control of its directors, with the arrangement managed by an insolvency practitioner.
With certain CVAs involving substantial property portfolios, the only creditors adversely affected by the scheme of arrangement are landlords and local authorities. All other creditors paid in full. This ensures that the CVA receives the necessary majority of 75% of creditors voting for approval.
Under a CVA, a landlord may be forced to receive a reduction in the contractual rent payable under leases and closures of unprofitable stores. The only recourse available to the landlord is to assert in the courts that the CVA contains a material irregularity, or unfairly prejudices their interests as a creditor.
In the widely reported Debenhams case Discovery (Northampton) Ltd & Ors v Debenhams Retail Ltd & Ors  EWHC 2441, the court decided that treating landlords differently to trade suppliers does not amount to unfair prejudice. As a result, they may be justified by carrying out a balancing exercise to determine the overall fairness of the CVA proposal.
However, the judgment did reassure landlords that a CVA cannot restrict the right of a landlord to forfeit a lease.
To minimise the risk of a vacant property, in certain circumstances, a landlord may wish to consider a turnover-based rent agreement. This takes into account the uncertain nature of future trading. This may also be favoured by the tenant as it may give them the flexibility it needs to survive.
The importance of having a proactive debt recovery strategy
Under a CVA the landlord will often recover a substantial proportion of the rent they are owed under its lease. This is a better outcome to what would be the case if the tenant were to enter liquidation or administration. However, while CVAs may not seem immediately attractive, landlords should consider other potential alternatives too.
Before a tenant enters administration
If there is a risk of tenants entering administration or liquidation, being proactive and issuing letters before taking any legal action and/or court proceedings for the debt should always be the first port of call. It’s also like to work to a landlord’s advantage if the tenant is keen to avoid judgments that may breach its banking covenants or other commercial arrangements.
Following administration or liquidation
If a business is forced into administration or liquidation, a landlord’s claim will now most likely rank alongside other unsecured creditors behind HMRC, after having regained its preferential status in relation to certain tax liabilities with effect from 1 December 2020.
However, if the tenant enters a formal insolvency process, ongoing rent can be demanded as an expense of the administration or liquidation if they remain in occupation of the premises,
As we emerge from the pandemic and more commercial properties face risk of closure and lying vacant, landlords may choose to consider more open dialogue with their tenants, particularly around turnover-based rent agreements, rather than taking the more traditional option of enforcement action.
We’re here to help you through these difficult situations and guide you towards a solution - contact Sean Moran in our corporate restructuring and insolvency team, or James Fownes in our commercial property disputes team, for advice and support.
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