In all cases, a landlord should seek to engage with the retailer and its advisers at the earliest opportunity when any suggestion of a CVA is made. A company proposing a CVA is required to give only 14 days’ notice of the creditors’ meeting at which the CVA proposal will be voted on. Since no proposal is set in stone unless and until it is approved by the requisite majority of creditors – and the possible terms of CVAs are an open book, to a large degree – the landlord should take every step it can, if it appears that the company is inexorably heading into a CVA, to carefully consider the proposed CVA terms, to seek to secure the terms most favourable to it, and to extract whatever concessions it is able to prior to the CVAs being put to the company’s creditors for approval. Fast, incisive professional advice is critical at this stage, in order that the proposal ultimately presented does not represent a unilateral attempt by the tenant completely to recast its relationship with its landlord, which the landlord is then resigned to accept for fear of the alternative (see below). In this regard, landlords would be well-advised not to approach the CVA in a vacuum, and, as far as possible, approach other landlords (and similarly placed creditors, if relevant) in order to attempt to build a consensus as to preferred terms of the CVA proposal and obtain as much leverage as possible over the tenant to encourage it to reach the preferred compromise position.
“Landlords would be well-advised not to approach the CVA in a vacuum, and, as far as possible, approach other landlords… in order to attempt to build a consensus as to preferred terms of the CVA proposal”
A landlord presented by a retailer with a CVA proposal faces a dilemma: support the CVA and take some of the pain itself; or oppose the CVA and risk the possibility of having to remarket the property, perhaps at a reduced rent (potentially, in competition with the other landlords with exposure to the insolvent tenant). Much will, of course, depend on the location and marketability of the leased property or properties in any given scenario. In recent times, however, it has often been the case that landlords have had little choice, from a commercial perspective; a CVA will represent a more favourable outcome than a terminal insolvency process (on the basis that the tenant continues to pay (albeit reduced) rents, rather than literally “shutting up shop” and paying no rent at all). In light of the spate of retail insolvencies that have occurred and the challenges posed by online sellers more generally, it is frequently the case that there is simply a lack of demand from other retailers with an attractive covenant strength to take up the stores if the present tenant fails, meaning the risk of the properties becoming unoccupied (and the landlord being liable for business rates) is a very real possibility for landlords. A further consideration is that non-institutional landlords operating in isolation, without finding strength in numbers among similarly placed landlords, often perceive opposing (or subsequently challenging) the CVA to be costly and the outcome uncertain. There is a strong public relations-influenced concern from landlords too; invariably, they will recognise the need to be supportive of a proactive recovery attempt by a retailer when the alternative – a terminal insolvency filing – would likely result in widespread redundancies of employees and damaging knock-on effects for suppliers.
Landlords will be well advised, in preparing to vote on the terms of a CVA, to seek to maximise their claims against the tenant as far as permissible, given that the voting threshold for approval of a CVA is purely value-based. While the nominee will normally value the landlord’s claim for arrears of rent at its face-value for voting purposes, the starting position for other, unascertained and non-particularised claims, such as for future rent and dilapidations, is likely to be to ascribe nil value to them. To the extent possible, therefore, ahead of voting on a CVA, a landlord should seek to quantify such claims, supported by expert evidence (e.g. as to the likely time it would take to re-let the property and an assessment of the costs of required remedial works), in order to persuade the nominee that its full claim should be valued appropriately, with the effect that the landlord’s vote carries more influence in the process relative to others who have not undertaken such diligence.
If a landlord is not minded to support a CVA from the outset, then it is free to take a range of actions prior to the CVA becoming effective (noting that there is no moratorium applicable to a CVA, except in the case of certain small companies or a company that is already in administration). In these cases, it is critical that decisive action is taken quickly. If relevant breaches of the lease have occurred, the landlord could seek to forfeit the lease; issue a claim for recovery of the debt owed; exercise the Commercial Rent Arrears Recovery enforcement procedure under the Tribunals, Courts and Enforcement Act 2007 (which has replaced the common law remedy of distress, in the case of commercial premises, but is limited to arrears of principal rent); or, if the landlord considers that the tenant is insolvent, make a statutory demand for outstanding rent and proceed to petition to wind up the retailer if the amounts owed remain unpaid at the expiry of the three- week period for payment. Given the gravity of these other options – and since the time for a consensual deal for the rescheduling of payments will likely have passed, it is usually the case that a landlord will be ill-advised to take such steps unless it has a willing replacement tenant lined up and ready to step into the shoes of the defaulting retailer. A further option open to the landlord is to draw down from a rent deposit in order to recover arrears of rent or other sums owing under the lease, although this will, of course, offer little comfort in circumstances in which there is no assurance against future breaches of the lease by the tenant.
“If a landlord is not minded to support a CVA from the outset, then it is free to take a range of actions prior to the CVA becoming effective… In these cases, it is critical that decisive action is taken quickly”
A CVA, once approved, can be challenged on limited statutory grounds by the making of a court application within 28 days of its approval being reported to the court (or, for a creditor that did not receive notice of the creditors’ meeting, within 28 days of its becoming aware of the approval of the CVA): where the CVA is unfairly prejudicial to a particular creditor’s interests; or where there is a material irregularity in the process of approval of the CVA. If the application succeeds, the court has the power to revoke or suspend the CVA or to order that the CVA proposal (or a revised proposal) be put to the company or its creditors for reconsideration.