This week we have seen the headlines about the Focus DIY Corporate Voluntary Arrangement (CVA). It is reported that landlords have accepted the CVA and that will enable Focus to continue a significant part of the business and to retain a large number of jobs. Welcome news in many respects.
CVAs can have a significant impact on a property investment so this posting considers how CVAs work and their impact on leases?
A CVA can be used by a company in financial difficulty to make an arrangement with its creditors to cover the payment of all or part of its debts. It is a powerful tool if used correctly as it can bind individual landlords and vary lease terms even where a landlord did not approve the CVA or did not know of it at the time.
A CVA can only be put in place if it has been approved following a formal process governed by the Insolvency Act 1986. Each CVA has to be approved by a simple majority of the shareholders and by 75% (or more) in value of the company’s creditors who attend the relevant meeting and vote. Once approved by the relevant majorities, the CVA creates a binding contract that affects all the creditors referred to in the CVA. Individual landlords can find themselves with no say over how the terms of their lease are affected. The impact on investment value can be significant.
Leases can be varied by a CVA. Rent can be reduced and the lease term can be shorted. Some leases may just be brought to an end. The landlord is bound by the changes.
The 2007 case of Prudential v Powerhouse created the recipe for CVAs effectively releasing a parent company guarantee where its subsidiary is a tenant and is in difficulty although the CVA in that case failed because it unfairly prejudiced the landlords of stores that were closed when compared to landlords of stores that were to continue trading. As long as there is no unfair prejudice to a group of creditors, lease guarantees can effectively be removed by a CVA leading to falls in investment value.
This year we have seen a case involving the surrender of a lease following the tenant, Cotswold Company’s CVA. The landlord needed to mitigate its loss and to re-let the premises. The deed of surrender specified that the landlord could still claim for any payment due to it under the CVA even though the lease was brought to an end. If Cotswold’s landlord had not clearly reserved the right to make a full claim under the CVA then the deed of surrender would have ended the lease liabilities as normal and removed the landlord’s right to claim for loss of future rent.
All landlords need to consider the terms of any CVA presented to them very carefully to see what claims they may make and to vote accordingly. Some unfortunate CVA wording about future liabilities under any leases may have unfortunate consequences.