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Retail Apocalypse?

2018 has been a tough year for the high street.
Retail stores have had tough competition with online retailers, reducing footfall in shops including many well known high street names. Whilst in the 2000s companies would go into administration, the use of a company voluntary arrangement (“CVA”) has increased in the past year or so for major high street retailers, which allows them to continue trading.
A CVA offers a mechanism that allows the Tenant company (with creditor consent) to restructure its rent obligations on a mass scale, without the need to negotiate with each individual Landlord, in order to reduce the rent payable. This is a great tool available to a company in financial difficulty to restructure its debts.
In contrast to other insolvency procedures, the directors remain in control of the business which continues to operate broadly as normal, subject to the supervision of an insolvency practitioner.
The procedure of the CVA allows its company:

  • To settle debts by paying only a proportion of the amount that it owes to creditors or
  • To come to some other arrangement with its creditors over the payment of its debts.

A CVA usually comes into force at the time when the creditors of a company approve a CVA proposal relating to the company.
The proposed CVA is considered and voted on by the company’s creditors by way of a procedure, which can include email, correspondence and internet meetings. The approval of a CVA proposal requires a vote in favour by at least 75% of the creditors who vote on it. There is a further condition that no more than 50% of any creditors who vote against the proposal are creditors who are unconnected with the company.
The creditors should be aware this would impact significantly upon their property portfolio therefore the terms of the CVA should be considered carefully.
The effect of a CVA binds creditors who voted against the CVA, and creditors who received notice of the CVA proposal but who did not vote. Furthermore, the creditor is prevented from taking steps against the company that the terms of a CVA restrict.
The terms of the CVA will deal with this in most cases. Often the CVA will provide that, on the debtor company’s default:

  • The CVA supervisor may petition for the company’s liquidation.
  • The creditors of the debtor company cease to be bound by the CVA, allowing them to pursue the debtor company for the balance of the debt due.
  • The CVA supervisor must distribute any assets that he holds in partial satisfaction of the company’s debts.

CVA’s may therefore on the face of it seem unfair to Landlords, but debtors are less likely to challenge them mainly due to the fact they do not want an insolvent Tenant and a CVA is better than the alternative.
If a CVA was not in place and the Tenant went into liquidation or administration, then the liquidator will likely disclaim the lease as an onerous asset and in turn the lease obligations, mainly rent but also repair etc., will cease.  A Landlord may therefore see  a CVA  as a better alternative.
On the other hand, if a Landlord becomes aware of a CVA proposal, they may want to forfeit the Lease before the CVA proposal takes place. This will depend on the terms of the forfeiture provisions in the Lease and whether the CVA proposal will itself be an “insolvency event” within the Lease.  Unless the Lease has a forfeiture clause that is wide enough to include discussions in contemplation of a CVA within the definition of “insolvency event” then shrewd tenants will ensure that they pay their rent and hold a meeting to approve the CVA before the next rent payment date arises.
Majority of the time, particularly if there is no guarantor,  a CVA which will bring in some rent for a time, and may be a better option than forfeiture.  This is especially the case in the current market where more and more high street shops lay empty and the appetite for new tenants seeking such premises is low to say the least.

If you need any advice, please contact our Specialist Team on 0800 088 6004.