Wake Smith directors Elizabeth Shaw and Paul Gibbon look at the impact for landlords on the increasing move towards mass scale retailers and Company Voluntary Arrangements (CVAs).
If you are a commercial property landlord, you’ll be aware how challenging life can be.
Complications are around every corner – terms of tenancies, negotiating new leases, lease renewals, rent reviews, break clauses, tenants wanting to make alterations or subletting, energy efficiency regulations, health and safety obligations – the list is endless.
Paul said: “This assumes, of course, that your tenants are doing well. It is a whole new ball game if a tenant begins to struggle or, worse still, becomes insolvent., In the current economic climate the risk of that happening has increased if the tenant is in the retail sector.
“We have all witnessed for quite some time now, and joined, the rapid increase in consumers shopping online leading to the huge change in buying habits.
“Many retail businesses have collapsed due to the competitive online marketplace while others remain in a state of flux such as House of Fraser, New Look, Debenhams and the Arcadia Group.”
A CVA is an insolvency procedure, often used as a rescue mechanism and secures an agreement with creditors to potentially restructure a business model, control company debts, keep the doors open and preserve the business.
Elizabeth said: “With an increase in businesses opting to choose this restructuring method, many landlords are questioning whether the process is being exploited at their expense.
“Under a CVA, a retailer can opt out of lease agreements with landlords on underperforming stores and vacate them entirely, while negotiating rent reductions of huge percentages on the rest of their estate.
“Disadvantages for landlords, if CVAs are passed and approved by the company’s creditors, may include potentially unfavourable terms in lease agreements. These could be restrictions on future rent demands to be paid by tenants or landlords’ rights in the event of future rent arrears.” The landlord’s rights will depend upon the terms of the CVA and every case will be different.
“Many landlords are left with no option but to accept reduced rent, in order to safeguard at least some income.”
So what can be done to attempt to mitigate the potential risks?
Insolvency generally can be a minefield for landlords. It may come as a surprise that in some instances, a CVA may release former tenants/ third party guarantors from liability because of what is known as “guarantee stripping”; this is a complex area of law.
Also, as an unsecured creditor in a CVA, your voting influence usually depends on the value of the debt, but in the case of landlords only existing rent and arrears are taken into account plus a nominal £1 for future rents. A landlord creditor is bound by the terms of the CVA if it was entitled to vote regardless of whether it actualy voted.
Paul and Elizabeth suggests some useful tips.
Act quickly
There are options for landlords if they act quickly. If rent payments are coming in more slowly or arrears are building up, don’t wait for it to turn into a CVA proposal or a winding up petition – contact Paul or Elizabeth so that they can put a plan in place. Depending on the circumstances it may be better to take action before the tenant enters a CVA. But you won’t always get forewarning until you are faced with a CVA proposal to which you have to respond within 14 days.
As a retailer, how could a CVA affect me?
Typical CVA proposals now place premises into different categories.
1 Profitable premises where no changes or only minor ones are proposed to the leases.
2 Marginal premises where substantial renegotiation of leases is required
3 Unprofitable premises that will close.
CVA proposals are specific to the individual case – each one is different. They can be modified if creditors reach consensus.
Constructive engagement is important. Landlords will not always lose out under CVAs, particularly compared to the alternatives of administration and closure.
By seeking a consensus with other creditors, particularly other landlords, you can put together a sufficient bloc to resist the imposition of a CVA or at least negotiate improved terms – for example, reinstating the full rent if the CVA fails. This may also help prevent particularly controversial proposals going ahead, such as removing a landlord’s rights.
Elizabeth added: “The optimal result of a CVA is to find ways to rescue a business, while still providing a landlord with a steady income stream. However, we are seeing landlords having to compromise their rights and obligations, and even then still seeing businesses going under, leaving a landlord with an empty property.
“Debate surrounding the concerns and reform of CVAs continues. While there is widespread concern that the CVA process is being misused, settling on definite proposals is a difficult task and it seems reform will come in the guise of curbing obvious abuses.
“CVAs are not going away. Landlords and their advisors should assume they will be an ongoing part of the retail sector and consider both the long and short term benefits and risks that a CVA could offer them.”
For advice on CVAs for landlords and any other property matters call us on 0114 266 6660.
