Company Voluntary Arrangements: The Challenges & Consequences for Landlords in a Changing Commercial Landscape
We are all aware of the challenges that coronavirus has brought to the high street over the last year. With a combination of lockdown and forced closure arguably accelerating a broader trend of online customer migration, the need to provide viable business models has challenged both independents and large, long established brands facing dwindling footfall and ongoing operational costs. For many commercial enterprises, the need to restructure has become imperative and company voluntary arrangements (CVAs) have provided a route by which insolvency can be avoided and creditor obligations met, albeit on a flexible - or more reduced - basis than originally intended.
Implications:
However, these arrangements can also present implications for landlords beyond the need to financially compromise with commercial tenants, in regard to ensuring proportionate representation in agreeing revised terms and the ability to preserve important rental income. With CVAs commonly comprising an agreement with creditors under the supervision of an insolvency practitioner, many CVAs require approval by 75% of creditors – and become binding for those that vote against it. For a landlord, perhaps unwillingly facing the prospect of significantly reduced rents as part of the arrangement, there is the possibility that certain tenant organisations could manipulate the agreement, particularly where rent is linked to the value of sales and a shop premises serves as little more than a showroom to drive online sales, making proportionate attribution difficult and further driving down rental incomes. This has become increasingly prevalent in recent months, and most recently, with a group of landlords filing a legal challenge to the restructuring of Clarks and seeking redress on the issue of unfair revenue retention.
There is also the prospect that a commercial tenant could effectively enact a surrender or change to the terms of their lease, exposing the landlord to further risk. However, a CVA does not close off a landlord’s rights entirely and there are, even under the ongoing emergency legislation, legal options for landlords to explore – particularly where a tenant still refuses or fails to pay the agreed rent beyond what has been enshrined within any CVA.
Options & Remedies for Commercial Landlords:
The Coronavirus Act 2020 introduced significant restrictions on landlords in terms of their ability to recover commercial rent arrears (CRAR) or pursue options for forfeiture. With the “relevant period” of these moratoria extending to June 2021, the following points are noteworthy:
- Possession proceedings – from the 1st of July 2021, unless the moratorium is extended again, landlords will be able to forfeit the lease and take action to recover property. Landlords can also continue to issue proceedings for forfeiture for breaches other than failure to pay sums due under a lease.
- CRAR – Similarly after restrictions end, CRAR can be used for rent arrears with the minimum number of days’ outstanding rent required being 457 days’ rent between the 25th March and 23rd June, and 554 days’ rent between the 24th and 30th June. Remember, this is not a “rent-free” period when considering what is owed.
- Section 146 – Where there are potential breaches of covenant, such as carrying out unauthorised alterations, serving a s146 notice and requiring the breach to be rectified could be applied, and if the tenant in fails in this requirement, a landlord can apply to forfeit the lease.
- Statutory demands - Under the Corporate Insolvency and Governance Act (CIGA) statutory demands served since the 1st March 2020 can form the basis of a winding up petition after the expiry of the current moratorium (after the 30th June 2021).
- Recovery from former tenants & guarantors – If the commercial tenant has a third-party guarantor, a landlord may be able to recover rent arrears due, from the guarantors.
- Debt Recovery – Proceedings can still be issued in the Courts and is a practical alternative should a landlord no longer have the right to forfeit.
- Voting rights in a CVA – And, returning specifically to CVAs, in mitigating future risks, agreements on rent concessions could record that those arrangements will automatically terminate, where a proposal for a potential CVA is submitted to the creditors of any tenant company to vote upon.
As we begin to emerge from what is hopefully the worst of the crisis, with the end of legislative as well as social restrictions, the range of options for landlords to consider in preserving the value and integrity of their investments under challenging, and even restrictive conditions, will continue to open. Should you need advice and support, we would be happy to discuss effective options and remedies with you.
Contact Phil Parkinson: p.parkinson@jbleitch.co.uk
