Rent Reductions in a CVA

It has been talked about in the news: various household names such as Debenhams, New Look, Homebase etc securing rent reductions and vacating premises using a Company Voluntary Arrangement (CVA).  A CVA allows the company to terminate its liabilities under a lease provided that the majority of creditors by value (75%) agree. Landlords who do not have large arrears or rent owed to them are permitted in law to vote to the value of only 12 months rent.  In the majority of cases, landlords make up a small proportion of the total debts so they are routinely out voted by suppliers, HMRC etc.

In many cases the CVA proposal asks that landlords not only allow tenants to vacate but also accept large rent reductions on their premises.  In the case of House of Fraser landlords were separated into classes with some only receiving 10% rent.  The flip side of this was that the landlords did have the option to take back the premises after 60 days notice.  In most cases, landlords reluctantly agreed on the basis that it was better to have a tenant paying some rent and being liable for the rates than the hassle of finding a new tenant, refit and be liable for empty rates.  Recently some landlords have taken back New Look stores and Jamie’s Italian premises.

So, if you are a struggling business with expensive/non profitable properties then how can you put pressure on the landlord to give you a rent reduction?  If your business is buckling under pressure from creditors but it is viable, were it not for these debts then a CVA is a good option which will enable you to vacate those premises.

What if you only have one premises, can you get a rent reduction?

The answer is really that you should at least just ask.  Landlords are reluctant to reduce rents for three main reasons:

• The rent is the going rent for that property in an active market and they are confident they can re-let the premises if you can’t pay
• Any bank loan to the landlord is dependent on a certain level of rental cover
• A contract/lease should not be changed retrospectively

How could we help in these circumstances?

The most important thing is transparency. A landlord may well agree to concessions if;

• The business is able to prove that the rent is too high and the business is struggling as result.
• Even if the rent is reasonable the business is likely to go into an insolvency process unless the landlord gives it some concessions, with all the problems that would entail.
• Due to the Coronavirus pandemic landlords are in a weak position if their tenants have been forced to shutdown.

It should be remembered that a rent concession does not mean that the total rent is not payable.  It can take many forms:

• An informal agreement not to forfeit the lease or send in bailiffs if less rent is paid
• An addendum to a lease which has more legal standing
• A new lease

KSA Group has enormous experience in negotiating with landlord whether as part of a CVA process or to negotiate with landlords specifically.