Landlords, are you prepared for when a CVA strikes?
Company voluntary arrangements (CVAs) are still a popular option for many failing businesses, but they can leave commercial landlords struggling, without tenants and stable rental income.
Vicki Simpson, our real estate insolvency partner, explains why it is so important for landlords to open an early dialogue with directors and administrators when a CVA is announced:
What is a CVA?
CVAs are one form of insolvency process that failing businesses use, to try and recover the company’s financial position. Allowing the business to continue trading during insolvency proceedings, CVAs are only used when there is the belief that part of the business can be saved.
Why has the number of CVAs increased?
• Rising property rates
• Changes in consumer behaviour, such as the rise in online shopping
• The uncertain economic climate causing a drop in consumer spending
These factors have resulted in tough times for the UK High Street, and the CVA trend is likely to continue until retailers start adapting.
How do CVAs benefit retailers?
• Property portfolios can be reorganised
• Lower rental rates can be negotiated with landlords
• Reducing the number of retail premises lowers overheads
• Trading can continue
How do CVAs impact retail landlords?
When an administration is announced, a level of uncertainty is created. There is a risk that landlords could lose their tenants, and unless administrators decide they wish to retain that particular asset, landlords could find themselves faced with slashed rental incomes, where retail tenants have been released early from their tenancies.
How can landlords minimise the disruption?
Opening a dialogue with the directors of the tenant company as soon as there is a suggestion of administration is key to minimising disruption. Learning the details and extent of the situation gives landlords time to prepare and consider their options.
It’s important to remember that landlords do not have to agree to the terms presented to them by administrators. If they wish to remove themselves from the situation early, a deed of surrender can be offered. This is a consensual agreement between a landlord and the business’ administrators that ends a lease. Under normal circumstances, a cooling-off period hinders landlords from ending the lease and marketing their property during a CVA, but this is not the case with deed of surrender agreements. Many administrators are willing to accept these agreements, so they have one less cost to consider.
Cutting losses early provides some certainty to landlords. They can begin to market to potential tenants and in turn rebuild a rental stream to recover any losses that may occur from the CVA.
Taking a proactive approach is essential to riding out the wave of a retail CVA. Discussing concerns at the earliest possible opportunity and seeking legal advice when a tenant begins to show signs that they are facing financial difficulties is important. This will allow landlords to maintain a rental income during the unstable retail climate.