In the last month alone we have seen both the approval of a company voluntary arrangement (CVA) by the creditors of Carpetright and reports in the property press that Poundworld and House of Fraser are considering CVAs too.
Carpetright's CVA provides for the closure of 81 stores across the UK and the Poundworld discussions could result in the closure of up to 100 of its 355 stores.
Carpetright and CVA are, however, far from isolated cases. To say that the UK's retail market is in a state of turbulence seems, therefore, to be somewhat of an understatement.
Given the dominance of CVAs as the restructuring process 'de jour' for insolvent retail tenants, it is imperative that creditors, and particularly landlords, properly understand the mechanics of these arrangements and are aware of their potential effects on the financial performance of property assets.
What follows is a headline summary of the key points property professionals need to know in relation to the CVA regime.
What is a CVA?
- It is an informal, but binding, agreement between a company and its creditors.
- Its purpose is to allow the company to avoid liquidation by rescheduling or reducing its debts.
- It can be standalone, but it can also supplement other insolvency processes, most commonly administration (which brings about an automatic moratorium preventing creditor action against the company).
- It has the benefit of flexibility, as its terms can be tailored to a company's exact requirements, based on its property portfolio.
How is a CVA approved?
- The person proposing a CVA sets out the proposed terms of the arrangement as well as a statement of the company's affairs (with details of debtors, creditors etc.)
- Creditors are given at least 14 days' notice of a meeting to approve the proposals.
- A CVA must be approved by 75% (by value) of the creditors who vote on it.
- It binds both known and unknown creditors in relation to debts that the CVA covers. It is therefore imperative for creditors to understand what the proposals entail, even if they have no intention to vote on the proposal.
There is very limited scope to a challenge a CVA on the grounds of unfair prejudice or material irregularity, but there is a fixed 28 day window within which to do so.
What is the impact on landlords?
A CVA varies the terms of the company's lease for the duration of the CVA. While there is no automatic moratorium, it could nonetheless limit a landlord's ability to forfeit or exercise CRAR (seizure of goods) over a tenant company's assets.
In recent years, it has been common for retail CVAs to divide landlord creditors into categories depending on whether their property is a profitable store or not, with different consequences for each. These could include: full rent (but paid on a monthly basis); half rent for a defined period of time; or nil or 25% rent with a view to closing the store as quickly as possible.
The closing of the doors to the last Toys 'R' Us and East UK stores in recent weeks should serve as a cautionary reminder for landlords of the need to be braced for tenant insolvency.
Knowledge in insolvency situations is key,as is acting swiftly and decisively.
The greater the information that landlords can obtain about their tenants' businesses (and turnover information is particularly useful for this) the better sense they will have of the health and viability of those businesses. Getting hold of this information is crucial if landlords are to put themselves ahead of the curve and safeguard their property interests.