This has not only hit the headlines of the property press and publications, but also at national and public level. The reality of large retailers like Debenhams and House of Fraser potentially going under has hit home hard.
It’s actually brought the reality of property and landlords more to light. Most people will assume that such occupiers own their property rather than have to let it from a commercial landlord, never mind realise the large rental figures at hand.
Quite rightly this is all coming to light for people to realise. However, it can come across as confusing and scary if people think this is now going to automatically affect everyone to some degree.
The Four CVA Basics
Hence, here is our resource on these ‘CVA’ agreements that are hitting the news – a specific legal mechanism that occupiers are using to try and get out of debt.
These are deliberately not meant to be tedious with endless technical detail – quite the opposite, and simple points in order to get the gist and see if it affects your own property situation.
1. The General Idea
So, to begin with, let’s be clear on what the purpose of the CVA is.
Full-on insolvency is when a company is going bust and will be declared no longer solvent, and administration is a stage before this where an external administrator is appointed in order to try and make a go of the business and take measures such as selling parts of it off.
The CVA came in through the Insolvency Act 1986 as a measure before these two other ones; for the business to invite all those due monies (creditors) to come to an amicable agreement on how these can be paid-off over time.
Hopefully, with some sensible measures and even debt write-off or future investment, something can be agreed to salvage the situation.
This CVA is also specifically applicable to a legal limited company set-up and focused more on the bigger-name retailers and leisure businesses that are simply struggling for all kinds of reasons. Large overheads, hard and uncertain economies, and change in consumer behaviour with the new digital world.
2. Who’s Involved
Therefore, this is often instigated by the company directors, but can be from creditors and insolvency practioner as well.
At least 75% of the creditors by size of debt must agree this, either communicating with the appointed practioner dealing with the CVA or attending any meeting they set-up.
Landlord’s due large sums of money will be one of the big ones and having a large sway in the decisions, hence the awareness in the actual press.
Also, although the focus is on what can happen to a trading tenant that affects the landlord, don’t forget this can work the other way around, and for other parties.
So, landlords may also suffer and cause issues with due payments back to a tenant, and cause more administration-hassle knowing where usual monies like rent payments then go.
Plus, other parties like contractors or advisors can also be affected, something you’ll probably be involved with when managing property.
3. The Sums Involved
You then need to look at what the total amounts at stake are here.
So even with the obvious rent you need to look at future amounts and increases due from say rent reviews, plus other non-rent ones like service charges, insurance premiums, and even any dilapidations and repairing liabilities (some may be unquantifiable unliquidated sums).
Then be clear about if any other means of collecting these are still applicable in order to reduce this debt.
So typically in a commercial lease you may have a guarantor or former tenant to call upon, or a rent deposit to draw down, but watch out for the CVA agreement not allowing this and if deposit-monies are separately held outside of this remit.
4. The Best Way Forward
You now need to see how this all applies to your situation.
These things can happen as a surprise as the business Directors suddenly instigate, therefore it’s best to keep your finger on the pulse and monitor their performance through published accounts and a general open dialogue.
If it is affecting you, then get into the detail and seek the right advice. You may then have a steer on how the CVA agreement is made, with specific issues able to be documented within this.
It might be worth contacting other known creditors and clubbing-together for a coherent approach and agreement.
And in some cases, its going to best to accept and try and be part of the detail; whereas other times it’s worth contesting within the 28-day period with claims of being unfairly prejudicial or material irregularity.
If you are playing hard-ball, then remember that once a CVA is in existence they have traditionally restricted a landlord forfeiting the lease for pre-CVA breaches (only post ones), but a case in 2019 has allowed landlords to go down this route if required.
And although the CVA can not force a landlord to say take a surrenbder of the lease or insert say a new break clasue, it can tweak others issues like the amount of rent and service charge paid, and dilapidations liability.
However, in reality such reductions can provide the landlord with rights to terminate the lease through a termination notice and election to forfeit or surrender (although difficulties if holding over under the Landlord & Tenant Act 1954).
The CVA Dilemma
Therefore, in all the frenzy of CVAs in the news, don’t over-panic before you know the whole truth.
Immediately see if this actually affects you and keep an eye on all kinds of linked people with a property if there are solvency alarm-bells beginning to ring.
And if it does happen, then remember that the idea is to try and make a success of the business and see what can be agreed for everyone’s advantage. Correct voting and diligent document-analysis may well pay off dividends in the future.
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