Tenant going into a CVA – How does that affect my rights as Landlord?
Company Voluntary Arrangements (CVA’s) are more and more being used by commercial tenants – particularly in the retail sector – to help them restructure debts and liabilities. One of the key concerns for the tenant is the amount of rent they have to pay on their commercial premises and if they can get that reduced/deferred that may make the difference in their financial viability.
Normally Landlords get advance warning of problems because rent payments start being made late or are not the full sum. Your tenant may approach you direct to see if some concessions can be agreed. However if you cannot reach an acceptable solution a Landlord may find the tenant then chooses to enter into a CVA.
The benefit of a CVA is that the tenant can continue to trade whilst paying back an agreed portion of the debt owed to its creditors over a period of time. In the rather unlikely situation that the Landlord is the sole creditor, the Landlord can to a certain extent control the situation.
The problem for a Landlord is when there are numerous creditors, as the CVA proposals are voted on and approved by the creditors – voting by value. It is therefore the amount of the debt owed by the creditors choosing to approve the CVA that determines if the CVA goes ahead. A Landlord can decline to vote or vote against the proposal but that does not mean the Landlord is outside of the CVA if the proposal is voted in. The creditors’ decision to accept the CVA is binding on the Landlord, even if the proposal includes a substantial reduction in the rent that would otherwise be received by the Landlord.
A Landlord is not entirely without options – albeit they need to be considered carefully before taking them.
If the Landlord has been so badly affected by the CVA decision that it is unfairly prejudicial it may be possible to challenge the CVA through the Court. However the Court is going to look at:
(a) The overall result of the CVA when compared with what might happen if no CVA is entered into.
(b) How the other creditors have been treated in comparison to the complaining creditors.
Be aware, however, that ultimately a Landlord retains its rights to bring the Lease to an end by using the right of forfeiture. The Court in the case of Discovery (Northampton) Ltd –v- Debenhams Retail Ltd in 2019 confirmed that a CVA cannot limit a Landlord’s entitlement to forfeit the Lease if the rent is not paid.
In this case the Landlord brought a claim that the CVA terms were unfairly prejudicial because they had a greater impact on the Landlord than they did on the other creditors. The Court decided that as the Landlord did have the right to bring the Lease to an end and the CVA could not restrict that right, the Landlord was not being treated unfairly.
If a Landlord does forfeit the Lease; quite apart from the commercial consideration of – can I get another Tenant on board? – bear in mind that even an insolvent tenant has the right to request relief from forfeiture.
In SHB Realisations Ltd –v- Cribbs Mall Nominee (1) Ltd in 2019 the Landlord forfeited after the tenant had gone into administration and then liquidation. The tenant applied for relief and the Court used its powers to grant relief on conditions. In this case allowing the tenant a further 3 months to try and find someone to take an assignment of the lease. The Court took into account that the tenant and its lender, would otherwise be losing a valuable asset and lose the ability to try and reduce its indebtedness. In balancing those issues with the Landlord’s position, the Court was happy that a small compromise was appropriate.
If you are a Landlord with a Tenant contemplating a CVA or actively seeking one, and you need to check your legal position, contact Frankie Tierney in our Dispute Resolution team on email@example.com .