The landlord perspective on CVAs: 4 takeaways
On Thursday 28 February, I attended a BPF seminar on the impact of Company Voluntary Arrangements (“CVAs”) on landlords. The panel discussion reflected on practice to date following the rapid increase in CVAs in 2018, as well as the future of CVAs and the BPF's thoughts on reform.
The lively panel, comprised of John Cook (Capital & Regional and Chair of BPF Insolvency Committee), Tim Cooper (Legal Director, Landsec), Tom Vickers (Partner, Slaughter and May), Romain Lanier (Director, PJT Partners), David Riddell (Partner, PJT Partners) and chaired by Janes Edwarde (Partner, Slaughter and May), left the audience with plenty to think about. Here are four takeaway points of note:
1. The rise and rise of CVAs
The panel noted the rise of CVAs amongst retailers in 2018 such as House of Fraser, Toys 'R' Us and New Look, as well as amongst the casual dining sector, including Gourmet Burger Kitchen and Carluccios. The panel predicted a reduction in the overall amount of CVAs for 2019 (simply as so many key high street brands had already been through the process in 2018), but anticipated that the popularity of the CVA model would not diminish. Further casualties were expected due to pressures stemming from the rise in online sales, the burden of fixed business rates, minimum wage rises and cyclical factors.
2. Issues with CVAs from a landlord's perspective
The panel raised the apparent injustice in the fact that rent rates are not the primary cause of financial troubles for many retailers, but rent reductions are looked to as one of the primary solutions, compensating for other issues.
It was also explained that struggling retailers will most often consult equity and debt holders to work out a restructuring plan, with a CVA with unsecured creditors following on from that, giving little opportunity for landlords to affect the more holistic plan. These issues are compounded by the discount applied to contingent liabilities arising from leases (such debts are commonly discounted to a quarter of full value), giving landlords drastically reduced representation on a value basis as against other unsecured creditors with fixed debts.
The categorisation of leases as part of the CVA (some leases remaining untouched, some with imposed rent reductions and some terminated or subject to rolling breaks), means that landlords often end up focusing on disputes amongst themselves as to categorisation, rather than focusing on challenging a restructuring proposal as a whole by banding together.
3. Landlords can, and should, interrogate insolvency practitioners administering CVAs
A further issue discussed by the panel was the lack of transparency in the CVA process. The ICAEW statement of insolvency practice, which governs the conduct of CVAs by insolvency practitioners, (SIP 3.2), provides that:
"An insolvency practitioner’s reports should provide sufficient information to enable the company’s shareholders and creditors to make informed decisions in relation to the proposal and the CVA, and report accurately in a manner that aims to be clear and useful"
The statement is broad and subjective and the panel found that, in practice, the reports provided to creditors often omit elements of the key information, such as a business plan for rescuing the business, details of any new cash injection, the performance of each store and how the leases have been categorised. At the same time, even the information that can be found in these reports is often difficult for smaller landlords to understand.
The panel suggested three practical steps for landlords:
- Request further information from the insolvency practitioner in the 14 day window between the provision of the report and the CVA approval meeting. Whether or not this information is provided may depend on the bargaining power of the landlord involved, but reference to SIP 3.2 may assist.
- Ask questions at the meeting held to approve the CVA. The BPF has published a guide of "red flag clauses" in CVAs that landlords should watch out for and challenge.
- Landlords should not be tempted to confirm to the insolvency practitioner which way they will vote prior to the CVA approval meeting. Withholding your position can be a useful bargaining chip to request further information or raise questions or proposed amendments.
4. Future reforms are unlikely to come from parliament
It has been confirmed that amendments to the CVA regime are not on the parliamentary agenda, despite proposed reforms in other areas of insolvency legislation. Some landlords, such as the House of Fraser creditors, are seeking to challenge CVAs on the basis of unfair prejudice to creditors, attempting to use the courts to introduce new boundaries. Whether this will work remains to be seen, with the House of Fraser case settling out of court. Legal challenges on this basis need to be brought within 28 days of the approval of the CVA and legal costs can be prohibitive, so the panel did not expect to see a rise in the rate of legal challenges to CVAs.
The BPF is instead targeting the ICAEW statement of practice governing CVAs and are lobbying for updates to be included to improve the position for unsecured creditors with contingent debt.
In the meantime, landlords facing CVA proposals from tenants should actively participate in the process and try to gather as much information as possible from the insolvency practitioners about the state of the tenant's business and the restructuring plan as a whole. Landlords should also consider co-operation with other landlord creditors as a means of ensuring the fairest possible outcome for unsecured creditors as a group.
Kathryn is an associate in our Commercial Real Estate team.