How to terminate leases in a CVA
Using a company voluntary arrangement (CVA), companies can exit non performing properties and free them from any lease obligations, thus crystallising the liability. Rent payments are stopped and the landlord can be prevented from taking recovery action.
ReadA landlord’s and tenant’s guide to commercial rent arrears recovery (CRAR)
For the better part of 250 years, landlords enjoyed the right to claim ‘distress’ for unpaid rent – meaning that they could seize (distrain) and sell their tenants’ goods to recoup the loss of earnings.The Rent Act 1977 stripped this right from residential landlords1, but commercial landlords continued to be able to exercise distraint until April 2014, when distress laws were replaced with the commercial rent arrears recovery (CRAR) process2, 3. So what exactly is CRAR? Like most archaic UK legislation, distress law was unnecessarily complicated and, many felt, rather unfair. The CRAR rules that supersede them are intended to be simpler and more balanced, with a greater focus on tenants’ rights than their predecessors.CRAR still allows a landlord to collect overdue rent without the need for a court order; however, it applies only to commercial tenancies, and the tenancy must be subject to a written lease. It can only be used to recover rent and any interest and/or VAT payable under the terms of the lease. Landlords: enacting the CRAR procedure Before claiming unpaid rent from a commercial tenant, you must remember the following:The arrears must be at least seven days’ worth or more at the time the notice is served and at the time of enforcement You do not have the right to seize your tenant’s goods yourself; they can only be seized by a certified enforcement agentOnce you have found an authorised enforcement agent, you will need to fill out a Warrant of Control form to enable them to begin enforcement action. The enforcement agent will then take over the process, issuing a seven day notice to your tenant in the first instance.If the rent remains unpaid at the time of enforcement, the agent will enter the property and take control of certain goods located thereon to be sold at public auction. Tenants: your rights under CRAR Firstly, you must remember that a notice of enforcement binds goods to remain on the property, meaning you cannot sell or remove them. You can, however, delay enforcement by applying to court for a delay of execution or a set aside.It is possible to enter a controlled goods agreement in order to repay what you owe over time. Under such an agreement, the goods will remain on the premises, but your landlord’s enforcement agent will be able to remove them if you default on your agreed repayments.If goods are taken, the enforcement agent must provide you with an inventory of everything seized as specified by section 33 of the Taking Control of Goods Regulations 2013.If your lease has expired, your landlord can only use the CRAR process if:the lease ended within the last six months; the lease did not end by forfeiture; the rent was owed by you at the time the lease ended; you still possess some of the goods formerly located on the premises; you occupy the goods under a commercial lease; and your old landlords was, at the time the lease ended, entitled to immediate reversionBeing unable to pay debts, such as commercial rent, when they become due is a warning sign of insolvency. If this described your company’s situation, it is highly recommended that you seek insolvency or turnaround advice from a professional firm.References1. Rent Act 1977, s 147(1)2. Tribunals, Courts and Enforcement Act 2007, s 713. The Taking Control of Goods Regulations 2013, SI 2013/1894
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Landlords can aggressively collect rent again
Legislation had been enacted that stopped landlords forfeiting leases, issuing petitions or statutory demands where rent has not been paid due to Coronavirus. This protection has now expired as of the 25th March 2022.The government has now passed the Commercial Rent (Coronavirus) Act 2022 which in effect removes all restrictions on landlords to recover their rent arrears. However, companies that were forced to close due to the pandemic i.e. restaurants, pubs and gyms are eligible to enter into a legally binding arbitration process where they have not been able to reach agreement. This will resolve disputes about certain pandemic-related rent debt and should help the market return to normal as quickly as possible. It should be noted that their is a window of 6 months for the arbitration to be completed.The Government said the majority of commercial landlords had shown “flexibility, understanding and commitment to protect businesses during an exceptionally challenging time”.The British Property Federation have said that the inability of them to collect rent had "“undermined the UK’s attractiveness” as a place to invest in property and development, which could undermine the recovery.Melanie Leech, chief executive of the BPF, accused “large, financially sophisticated and well-capitalised businesses” of abusing the moratorium by withholding rent to improve their liquidity. She added that income from more robust businesses was essential so that the landlords could extend help to more vulnerable tenants like independent traders and boutique retailers.
ReadLandlords Settle Case Against New Look’s CVA Before Court of Appeal
3 March 2022New Look's landlords have just announced that they have settled with the company on the day before a crucial hearing at the Court of Appeal.17 May 2021New Look Landlords have been granted leave to appeal to the Supreme Court over their treatment in the CVA.Yet again the High Court has upheld the power of the CVA mechanism as a way of ensuring that a company can survive if the majority of its creditors (by value) agree to allow it time to get back on its feet. Landlords feel that it is unfair but if it is not to be the creditors who else? A panel of "experts"? A quango? The Government?Landlords complained that the switch to turnover rent “fundamentally rewrites” leasing agreements. Unfortunately, when a company becomes insolvent and, in the case of administration, all contracts are "rewritten".There is a shift in the balance of power between landlords and tenants given the loss of footfall on the High Street and the rise of online shopping recently. However, if everyone rushes back to the shops, post pandemic, maybe the landlords will be able to take a share on the increased turnover?17 March 2021It has been reported that New Look has entered a High Court battle with two of its landlords; British Land and Land Securities, over its proposed restructuring plans.In total, there were four landlords who challenged the CVA which involved switching stores to turnover based rents.The argument is that switching to turnover rents ‘’fundamentally rewrites’’ leasing agreements and deems the payments of arrears as ‘’unfair’’.10th November 2020New Look announce completion of its refinancing scheme which included a debt-for-equity swap to reduce debt from £500m to £100m and a £40m cash injection.The refinancing scheme was first mentioned in August, at the same time as its (now approved) CVA was first announced.CEO, Nigel Oddy said: “I would like to thank our banks, bondholders, landlords and creditors for their support during our financial recapitalisation process and CVA. Completion of the transaction today means we now have significantly enhanced financial strength and flexibility, and a sustainable platform for future trading and investment. Looking ahead, notwithstanding the challenging market conditions, we are focused on delivering our strategy to enhance our position as a leading convenient broad appeal fashion destination''.2nd November 2020It has been reported that 2 landlords, British Land and Land Securities have challenged New Look's CVA casting doubt on the company's ability to survive. The new lockdown will hit New Look hard as they only have a small proportion of their sales online (20%). Challenges against CVAs have not been successful in the past.5th September 2020In an unexpected outcome - New Look's creditors have approved its CVA proposals when put to a vote today. Creditors approved with a 75% majority vote in favour.The CVA features no store closures and saves all 11,000+ jobs. It looks to move more than 400 of its UK stores to turnover-based rental models, have an enhanced landlord break clause, and a three-year rent holiday on its 68 remaining stores.14th September 2020British Land, a landlord of New Look, owning 19 of its stores, plans to oppose its CVA proposal laid down to vote on tomorrow. Landsec, of whom own 10 stores also are believed to oppose as are Hammerson.The possibility that New Look's biggest landlords will vote against the plan, does not appear good for the retailer. Its chance of survival is thrown further into red.What will the outcome be tomorrow?6th September 2020It is not looking promising for New Look since around ten of its landlords have been reported to of rejected its CVA proposals, to be voted on by creditors in the next 9 days. Can the table still turn? Or is liquidation coming even more unavoidable now?26th August 2020New Look has announced it has reached an agreement with its financial creditors. This involves investing £40m in new capital and ''significantly de-leveraging'' its balance sheet. The group expect this to be complete on or before 31 October 2020.The company has also announced that it is launching a CVA, so asking landlords to accept new turnover-based leases across its portfolio.The fashion retailer also said it is launching a debt-for-equity swap on its current debts, looking to lower those from £550m to £100m.The British Property Federation have criticised the CVA proposal due to ''inaccuracies''.Drapers report more.10 August 2020According to This is Money, New Look is reported to be considering a company voluntary arrangment (CVA) since it looks to switch to turnover-based rents.Advisors from Deloitte are expected to be appointed as soon as this week.If a CVA is used, this would not be the first time for the company. The retailer used one in 2018 when landlords voted in its favour as it was used to improve the operational performance of the company.01 July 2020It is reported that New Look has given an ultimatum to landlords; trying to reach an agreement to move to turnover-based rents for its 500-strong store estate.Consultancy firm, CBRE, have been hired to help with the process. If discussions with landlords are not successful, likelihood of the retailer falling into a pre-pack administration is high.If a pre-pack is used, this would be the second financial restructuring it has undergone in less than two years, after its debt-for-equity swap with stakeholders in January 2019. At this last restructuring, New Look moved onto monthly rents for most of its portfolio and asked for rent holidays for some of its stores.Talks with landlords have been happening for most of the month though concern rises that some will block the proposal.A pre-pack has been discussed and is ‘’the last thing it wants.’’A spokesperson said, ‘’We are committed to seeking a consensual agreement with landlords to move to turnover rents, and work in partnership with them as we continue to navigate these increbily challenging and uncertain times together.’’The retailer employs 12,000 people across its UK and Ireland business.New Look are not the first to look at a move to turnover rents amid the covid-19 pandemic. Frasers Group are the latest to be looking at doing so. Other retailers have appointed administrators as a result of the pandemic: Debenhams, Laura Ashley, Cath Kidston. Some have also refused to pay March quarterly rents.
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CVA Advice For Landlords
Landlord affected by CVA – Should I Vote For Or Against? Should I Even Vote? High street names, once bastions of the High Street are using company voluntary arrangements to restructure their leases, to cut costs during the pandemic. But is this fair? Should I vote? These are just some of the questions we are being asked daily as CVA experts. Keith Steven has experience of dealing with over 500 CVA cases in 23 years, so he knows a thing or two about turnaround. We asked him to answer these frequently asked questions…..CVA Debate on the 7th November reviewed Q1 As a landlord should we vote? You are not obliged to vote as a creditor in a company voluntary arrangement. The CVA voting process is entirely optional. However, I believe it is important for all creditors and stakeholders to take part in what is an equitable process set out by the 1986 Insolvency Act. Yes, CVAs have been part of UK law since 1986.If you don’t vote at all, then your vote will be deemed to be in support of the CVA because it is not a vote against. Is that the impression you want to give as a landlord? By abstaining you don’t really influence the vote against.So, we would always recommend carefully reading the proposals put forward to you by the CVA nominee and question the nominees or indeed the company proposing the CVA on the terms of the CVA proposals. Not many creditors are aware that they can put forward modifications to change the proposal.If for example a CVA does not include an element of your debt, you can modify the CVA by proposing modifications. For this to have any bearing on the CVA decision making process you would have to have more than 25% of the overall votes cast. Question 2: As landlords should we vote for or against a CVA put forward by the tenant? That is a decision to be made on a purely commercial basis. It may depend on the proposal’s terms to deal with YOUR property and the properties and unsecured debts of other stakeholders. At this moment in time many ‘High Street’ CVAs are predicated on dealing only with the landlords’ leases for their so called dark stress (failing outlets). My view is it is not equitable to pick on one constituency for the purpose of closing stores. But this is for you, your board and perhaps investors/lenders to consider carefully.In our view, normal CVA arrangements should include most if not all unsecured debts that the company has at ‘the line in the sand’. Remember secured debt stands outside the scheme but can influence it(**). The benefit of this for the company is it reorganises its current liabilities, excluding secured debt, in exchange for an offer to repay a dividend over a period of years or a one-off payment. We call this the X dividend over Y years approach.By excluding debts such as non-domestic rates, employees’ debts, contingent liabilities, supply-side creditors and other short-term debt from the CVA, the company does not get the full benefit of the scheme. More importantly - in the case of Toys R’Us - HMRC brought the CVA scheme down for £15m of unpaid taxes, which were excluded from the CVA. Toys R’Us is no more on the UK retail scene. Q3: If I vote against what happens? This is an equitable process, if 75% or more of the eligible votes are cast in favour then the CVA is approved. If the vote falls short of that, the CVA is not approved and the company may go into administration or liquidation. Your vote may allow the CVA to be approved but your property agreement, lease or licence may be terminated by the CVA’s failure. Q4; If we vote in favour of the CVA what happens? As above the process requires votes to be cast either in favour, against or in favour with modifications. Your vote may allow the CVA to be approved but your property agreement, lease or licence may be compromised, or the rent reduced as set out in the CVA proposals. Q5: We are not sure what the CVA proposal we have received means for our property. Our insolvency practitioners, directors and regional managers are happy to give general guidance on the CVA’s terms and what the proposals may mean for you subject to the normal caveats and client conflict relationships. Do call us on 0800 9700539 Q6: I see there has been recent case law on CVAs. What is the situation? Recent case law regarding the New Look and Regis CVAs has not changed the situation much. Landlords are still treated as a creditor whose contracts have been compromised. That said, in the Regis case an arbitrary blanket discount on their claims of 75% was regarded as unfair. It is likely then that there will fewer cases of large discounts being applied to landlords’ claims for voting purposes and, in turn, that should make it more difficult for companies to impose CVAs on dissenting landlords. It is still possible to discount landlord claims for voting purposes, but the discount must be a reasonable method for estimating a minimum value.One of the most significant points to come out of judgments in New Look and Regis is that, where lease modifications at the landlords’ expense have the effect of increasing value for the benefit of shareholders, that benefit should be shared with the impaired landlords to avoid unfair prejudice.What if I want to know more about CVA? Please download our CVA Experts Guide with 120 pages of information here**Secured creditors can vote for the likely shortfall in their recovery if the company entered liquidation for example. Without relinquishing their valid security. Obviously, ALL secured creditors must be informed about the CVA process and take part in the scheme architecture.
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Personal Guarantee on Commercial Leases
Do I have to personally guarantee the lease for commercial property? When a limited liability company takes on a property the landlord will often ask for a third party to guarantee the obligations under the lease which, in the most part, is to pay the rent and service charge. This is to reduce the risk to the landlord should the company become insolvent. Most landlords will ask for this guarantee if the company is relatively new, with little trading history, or in a high risk industry. Many restaurants and hospitality businesses are asked for these guarantees. It is usually the directors of the company that are asked to personally guarantee the lease. As a director this means that you are personally liable for the rent if the company can't pay and the landlord can pursue through the courts and could even make you bankrupt. If I can't pay the rent can the landlord make me personally liable under the lease? Simply, If you give a guarantee then yes. Whether it is commercially sensible for the landlord to pursue you is a different matter. If you have no assets or the amount is relatively small that you owe then it might not be worth the costs. A landlord would need to issue a bankruptcy petition and in the end it might be better to concentrate on reletting the property with a tenant that can pay the rent. Obviously the landlord is only likely to call on the personal guarantee once the company has vacated the property.One important thing to realise is that if more than one person has been named as a guarantor then these people are what is called jointly and severally liable. What this means is that one person and/or all are liable. So it might be practicable that the landlord goes after the richest guarantor rather than pursuing each one individually especially if the others guarantors have little money! Can I get out of the personal guarantee I have given to the landlord? If your business has had a strong trading history and paid rent on time over a number of years then at lease renewal it would be a good idea to try and negotiate that the new lease does not need a guarantor. However, this will all be part of the negotiation and any landlord will be reluctant to give this additional security up. It might be that you can negotiate limits to the guarantee, such as it can only be claimed on in the first 2 years of the lease (incidently most business failures happen in the first 2 years) or that the guarantee does not include the family home. How can I avoid the guarantee being called upon? If the company is in a strong financial position then the guarantee isn't a problem. If the company starts showing warning signs of insolvency it is crucial that the directors act. It is all too common that directors are over optimistic or blind to the signs. This can seriously increase personal liability problems.So, the basic advice is GET ADVICE if you are worried your company could be getting into difficulty and you have a personally guaranteed the lease.
ReadMiss Sixty and the “Powerhouse” Principle
In our eNews of last week (email me if you wish to receive this monthly newsletter) regarding the Miss Sixty UK Ltd - CVA. See a copy below in italics"Another section 6 application this time not by HMRC but by a disgruntled landlord, called Mourant & Co Trustees.The s6 application is a bid to have the decision of creditors approving the CVA revoked, because the parental guarantor was unfairly prejudiced against.Mourant owns the Liverpool shopping Centre known as the Metquarter, where Miss Sixty and sister brand Energie had stores which were both were on 10-year leases. Crucially each lease was in turn guaranteed by Miss Sixty UK's Italian parent company, Sixty SPA.However, under the CVA proposed by Sixty UK to determine the shop leases, the landlord also lost the parental guarantee. Had the company gone into liquidation, the guarantor's obligations under the lease, ie to pay the rent and charges would have continued. The CVA, however, allowed Sixty SPA to walk away.Similar to the Powerhouse case the court is likely to find that the CVA was not able to unilaterally determine another contract i.e. the parental guarantee, without bilateral concurrence. Watch this case!Our views on CVAs are well known - always ensure that there is concurrence and consensus as much as possible.So, whilst Powerhouse indicates that a parental guarantee cannot be determined by a subsidiary CVA and the Miss Sixty case may vindicate the Powerhouse decision, this determination of a parental guarantee using the CVA as a tool is still possible if done with consensus and an appropriate payment to the landlord by the guarantor."Well it seems I was right on both issues; the court DID find for the plaintiff and the CVA was rejected because it was unfairly prejudicial against the landlords. Interestingly though, the judge stated that the compromise of a landlord's claim against the guarantor of a tenant debtor - also known as the Powerhouse principle - IS a valid legal mechanism within a CVA, as long as the compromise is not unfairly prejudicial.In a judgement that was critical of the nominees and supervisors of the Miss Sixty CVA, Hollis and Nick O'Reilly, then of Vantis PLC, who proposed a CVA as administrators of Sixty UK Limited, Justice Henderson found that a landlord could have been crammed down in this way, but was in fact unfairly prejudiced (Mourant & Co Limited Trustees and another v Sixty UK Limited (in administration) and others). The CVA was set aside.The judgement concludes: "I am conscious, of course, that I have not heard the administrators' side of the story, because of their decision not to participate in the trial. Nevertheless, I am satisfied that there is a prima facie case of misconduct on their part which ought to be considered by the professional bodies to which they are answerable. I therefore propose to direct that copies of my judgment should be sent to the appropriate bodies by which they are licensed to act as insolvency practitioners."This is something that the IP's regulator will have to consider carefully.However, the main point for landlords is that the case yet again underlines that CVAs are an enormously powerful tool that can compromise a lease and indeed, if properly prepared, may compromise personal and parental guarantees.
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