CVA USE REFLECTS CHALLENGES FOR RETAIL
05 November 2019
So far 2019 has seen a large number of CVA’s including those involving Debenhams, Arcadia Group and Monsoon Accessorize.
Aligned with this many retailers are struggling to increase footfall in High Street stores with an increasing number of shoppers choosing to shop on-line.
Whilst CVA’s may be helpful for struggling companies in difficult trading times and can be a lifeline to turn their businesses around and become profitable again, they are often not good for landlords who may well see a fall in rental income reducing the net value of their assets.
Largely, Landlords have little alternative but to accept the financial impact faced as a result of a CVA and the subsequent drop in rental income. If a majority of creditors vote against a CVA the company could be wound up with the Landlords sustaining greater financial losses.
Under a CVA the tenant essentially dictates the new varied terms of the lease to the landlord and the Landlord’s options are limited. Not all Landlords however are willing to accept a CVA lightly and we had the much publicised initial refusal of Intu to accept the terms of Arcadia’s CVA. Many Landlords are questioning whether the process is being exploited by tenants who are merely using it as a method to terminate leases, close underperforming stores and reduce rents essentially at the Landlords’ expense.
Once a CVA is approved Landlords cannot generally threaten or take legal action against the company in respect of claims that have arisen pre-CVA, and they are bound by the terms of the CVA which may not be short term in duration and could run for as long as 5 years.
Furthermore, whilst the law is developing in this area, generally pre-existing legal actions are stayed, and no formal investigation of the directors’ conduct (of the type employed in a liquidation scenario) is engaged. Whilst the supervisor of the CVA is an insolvency practitioner his primary function is to receive payments which the company agrees to make, report to creditors and distribute receipts amongst creditors. Hence, the directors retain day to day control of the company albeit within the confines of the CVA.
Depending on the wording of the lease, there may be an option for a landlord to re-let the property and, whilst lettings are still taking place, it can be challenging to quickly find a suitable replacement tenant willing to pay the market rent. There is much debate over what, in these challenging times, marks out one tenant as a stronger covenant than another.
Tenants want more flexibility and Landlords are granting shorter leases with more concessions. Banks and financial institutions appear to be accepting an increasing number of these concessionary leases and without a reversal this will become the norm in the future.
Other retailers, such as JD Sports and Primark are voicing their opinion and asking why “CVA tenants” are getting reduced rents and they are not.
The remainder of 2019 is set be challenging and there is every likelihood that more CVA’s will follow if not the in the later part of 2019 certainly in early 2020 after Christmas trading.
CVA’s are a complex issue and it is essential for Landlords to keep in touch with their Property Advisors to ensure that their interests are protected.
These are challenging times and surveyors must use all their experience to guide clients to a workable and pragmatic solution.