Gail Prentice-Jackson: CVA use reflects challenges for retail
So far 2019 has seen a large number of Company Voluntary Arrangements (CVAs), including those involving Debenhams, Arcadia Group and Monsoon Accessorize.
Aligned with this, many retailers are struggling to increase footfall in high street stores with an increasing number of shoppers choosing to shop online. Indeed, the RICS and Ulster Bank Commercial Market Survey for Q3 2019 indicated that the retail sector is increasingly feeling the pressure of this changing landscape.
Whilst CVAs may be helpful for struggling companies in difficult trading times and can be a lifeline, they are often not good for landlords who may well see a fall in rental income reducing the net value of their assets. Under a CVA the tenant essentially dictates the new varied terms of the lease to the landlord and the landlord's options are limited.
Not all landlords however are willing to accept a CVA lightly. Many landlords are questioning whether the process is being exploited by tenants who are merely using it as a method to terminate leases, close underperforming stores and reduce rents essentially at the landlords' expense.
Once a CVA is approved landlords cannot generally threaten or take legal action against the company in respect of claims that have arisen pre-CVA, and they are bound by the terms of the CVA which could run for as long as five years.
Generally pre-existing legal actions are stayed, and no formal investigation of the directors' conduct is engaged.
Whilst the supervisor of the CVA is an insolvency practitioner, his primary function is to receive payments which the company agrees to make, report to creditors and distribute receipts amongst creditors. Hence, the directors retain day to day control of the company, albeit within the confines of the CVA.
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Depending on the wording of the lease, there may be an option for a landlord to re-let the property and, while lettings are still taking place, it can be challenging to quickly find a suitable replacement tenant willing to pay the market rent.
There is much debate over what, in these challenging times, marks out one tenant as a stronger covenant than another.
Tenants want more flexibility and landlords are granting shorter leases with more concessions. Banks and financial institutions appear to be accepting an increasing number of these concessionary leases and without a reversal this will become the norm in the future.
Other retailers, such as JD Sports and Primark, are voicing their opinion and asking why 'CVA tenants' are getting reduced rents and they are not.
The remainder of 2019 is set be challenging and there is every likelihood that more CVAs will follow, if not the in the later part of 2019, certainly in early 2020 after Christmas trading.
CVAs are a complex issue and it is essential for landlords to keep in touch with their property advisors to ensure that their interests are protected.
These are challenging times and surveyors must use all their experience to guide clients to a workable and pragmatic solution.
Gail Prentice-Jackson is an associate director at Osborne King