CVAs for landlords: what do you need to know?

CVAs for landlords: what do you need to know?

August 16, 2019 by Sandra

A company voluntary arrangement (CVA) is a company rescue and restructuring option which can help ensure the survival of your company. If a company has a viable future, and the directors accept the need for change and are prepared to fight for its survival, then a CVA can be a powerful tool. Through avoiding liquidation, a CVA focuses on paying creditors what you can afford out of future profits – essentially, it allows you to ring-fence a struggling business whilst a solution is found.

CVAs are more important than ever due to the economic climate. For example, there has been an influx of retailer CVAs in recent times due to the decline in in-store shopping: retailers want to hang onto their high-street shops, and with more and more CVAs being approved, landlords’ support is vital to the continuing viability of a business.

What do landlords need to know?

Due to the rise of CVAs, landlords have had to get up to speed pretty quickly on CVAs, how they work, and the effect they can have on their properties. CVAs can prevent a tenant from going into administration or liquidation; however, there have been growing concerns for landlords that this form of company rescue procedure is being over-used by retailers (especially due to increased online shopping), disposing of underperforming stores at landlords’ expense. Here’s what you need to know about CVAs as a landlord to business owners.

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CVAs from a landlord’s point of view

Some landlords fear that retailers are using CVAs to discard badly performing shops, to improve profits by reducing rents or to enable a larger corporate retailer to move in. However, in most cases, they recognise where there is a genuine need for a company voluntary agreement and agree to compromise with a view to managing financial difficulties. In order for a CVA to be approved, a retailer must secure at least 75% creditor approval.

Landlords fall under the bracket of unsecured creditors, meaning their support is usually necessary for the approval and the ultimate success of a CVA. Landlords of a business with good financial performance will be paid rent in full, while those who rent out to underperforming sites will be paid a reduced rent; underperforming sites which are not viable will be closed.

CVAs are very flexible. For example, the terms can be tailored to landlords, as well as to reflect the past performance of retailers and expected future trading of individual stores. Understand the terms of your lease and provide an illustration of your calculation of losses which have crystallised and any future potential losses.

The property’s lease will fall into one of three categories

When negotiating the CVA, the company's leases can be put into different categories depending on their profitability:

Profitable (group A)
Marginal (group B)
Unprofitable (group C)

If a property falls into the profitable category, the terms of the lease may not be altered. The marginal category may result in some sort of rent reduction for the business, while the unprofitable stores are those which are considered to be unworkable, meaning that they’re likely to be closed and the lease obligation terminated.

The CVA process is flexible, denoting that the proposals can include break options, rent payments being made monthly rather than quarterly, compromises on tenant’s dilapidations obligations, as well as rent reductions.

Top tips for landlords

Our advice is to always review the proposed terms of the CVA as each one is different. Additionally, it’s always favourable to act quickly, especially to creditors meetings which are held at short notice. The most important note is to get advice from professional insolvency practitioners, who will be best equipped to advise you on the ins and outs of the situation: McAlister & Co are licenced insolvency practitioners and have a wealth of experience in helping business owners navigate all forms of insolvency, including CVAs. If you’d like to chat with a member of our friendly team about your position in a CVA, and what it may mean for you, we offer a free initial call.

Get in touch with us today to get the best advice, tailored to your individual situation.

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