Company Voluntary Agreements in commercial property
In recent months, there has been a growing trend in the way commercial tenants are using a particular type of insolvency prevention procedure, known as a Company Voluntary Agreement, to reduce the amount they are paying to their landlords. Here Helen Porter, Partner in our Litigation and Dispute Resolution team, explains how these types of agreements are used in commercial property, and the potential consequences for landlords if their use increases.
What are Company Voluntary Agreements?
Company Voluntary Agreements (CVAs) are an arrangement used by companies in debt or if they are facing insolvency. It is a voluntary agreement between a business and its’ unsecured creditors, providing a framework in which all or part of the debt is repaid over a fixed period of time.
Companies can arrange a CVA through an insolvency practitioner, who will negotiate the amount to be repaid and the period of time over which it will be paid. However, their proposal must be received positively by creditors who are owed a minimum of 75% of the debt. The business’s shareholders must also approve the measures by a simple majority.
How are CVAs being used in commercial property?
Over the last few years, CVAs have become a popular means by tenants of reducing costs in the retail industry in particular, which has led to criticism from property owners and landlords. A number of high-profile retailers, including BHS, New Look and Jamie’s Italian, have used CVAs to drastically reduce rents.
While the companies involved argue that the leases on their commercial properties are vastly over-valued and the only way of the business surviving is reducing rental payments, frustrated landlords argue that they are being unfairly targeted and financially scapegoated. In many cases, businesses are requesting large cuts in rental costs and are threatening to leave the premises if those cuts are not made. This puts landlords in a tricky position as they either have to accept the terms of the CVA and therefore receive lower rental payments, or the insolvency practitioner can determine the tenant’s obligations so that the tenant can leave the premises, leaving the landlord even further out of pocket and searching for new tenants.
However, it is not only landlords that are frustrated with the growing use of CVAs in the retail sector. Other retailers are bemoaning the competitive boost many organisations receive when they enter into such an agreement. In the cut-throat world of retail, the smallest reductions in expenditure can make all the difference between success and failure, and put the pressure on competitors.
The clothing chain Next is the latest business to argue that CVAs that reduce rents have provided competing businesses with an unfair advantage. They believe that companies are being rewarded for bad performance and that those organisations that have managed their financial affairs well are suffering as a result.
The future of CVAs
There can be no doubt that CVAs have been beneficial to a number of companies facing insolvency. Nor can it be said that CVAs are involved in the majority of insolvency processes; in 2017, CVAs were involved in just 1.8% of all insolvencies. However, the call for reform is growing louder and it does seem as though the system will be reassessed in the near future.
Landlords across the sectors are collaborating to fight specific CVAs and legal challenges are also being mounted against the use of CVAs in this way to reduce rental payments, with the majority arguing that landlords are being unfairly prejudiced against. The future for CVAs will largely depend on whether legislators consider this type of use an abuse of the system and whether this abuse outweighs the benefits of CVAs to those businesses that use them in a less questionable manner.
If you are a landlord and have been asked by your tenant to consider a CVA, you can contact Helen Porter in the Litigation team on 023 8071 7425 or email email@example.com. For general enquiries contact Hayley Steer on 023 8071 7412 or email firstname.lastname@example.org.
This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice. All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.