Andrew Pattinson and Anna Lowe interview Sarah Teal and Richard Symonds on how CVAs are currently being used, where they are going and what do landlords and tenants (and their advisors) need to know?
What exactly is a CVA and why is it different from other forms of insolvency process
A CVA is a company rescue procedure. It is a proposal whereby the company restructures its business (i.e. deals with historic debts, under performance stores etc.) to place the business on a solid platform going forward. Creditors need to vote in favour of the proposal, and it needs 75% support to approve it.
In contrast with other forms of insolvency process – with a CVA the directors remain in control, they restructure their debts and liabilities in business generally with a view to trading through it and everyone (hopefully) gets an upside.
A typical CVA will last for three years giving the company a breathing space with a hope of coming out the other side in better shape.
Why are we seeing so many, do they work (in your view) and why do they take up so much press space?
We are seeing a lot of CVAs in the market, especially in the retail sector as a result of the move away from bricks and mortar retail. Also, of course, Covid has increased the need and whilst some retailers have thrived, others are struggling as a result of large leasehold portfolios whereby rent is accruing and yet they have little to no income.
A CVA is a means to deal with those underperforming stores, restructure the lease terms and place the company onto a solid platform going forward.
Landlords generally dislike CVAs because they compromise their rents, often switching to turnover - rent arrears, service charge arrears and dilapidations are also sometimes compromised. Landlords can see it as the tenant effectively ripping up the agreed lease terms. Also, the new terms in some instances are not only imposed through the CVA term (typically 2-3 years) but also sometimes for the length of the lease.
As CVAs have become more commonplace, so the response of landlords to them has become more coordinated. Thus, the British Property Federation have written to the government stating that the legislation relating to CVAs should be overhauled – but arguably a CVA gives a better return to creditors than an administration. Thus although they may not be popular they do offer a genuine alternative. Also, crucially, if the landlord doesn’t like the revised terms they can take their property back as a CVA offers a break right if the terms of the lease are compromised.
What steps can be taken in the lead up to a CVA and what about post CVA?
As a creditor, if you don’t like the terms and your treatment, then you can contact the company and seek to renegotiate because the company will not want a vote against the CVA given the high 75% threshold of approval. This is a common approach where landlords don’t like the category the stores are in (e.g. they are an exit store or they are being reduced to turnover rent) and instead want to be in a higher category, whereby the maintain they contractual rent - depending upon that landlords vote and the importance of the particular store - it may be that the company is prepared to consider changing its categorisation. Further, it is open to creditors, post-CVA to challenge the CVA in the courts. There is a 28 day window to do this on the basis that the CVA unfair. If you are a compromised landlord you also have the option of taking your lease back.
What is the future of CVAs?
Covid has put thousands of normally profitable businesses at risk of collapse and this is a scenario where a CVA can become effective. When the government support runs out even healthy businesses will need to consider wider support to trade out of the current situation. Never before have we seen a time where the sales pipeline has stopped and for such a long period.
As uncertainty continues with the rollout of the vaccination program and exiting lockdown, we are likely to see a number of businesses impacted such as retailers, casual dining chains, gyms, hotels, cinemas seeking to renegotiate terms with landlords to allow them a chance of survival. Businesses will be looking at compromising outstanding rent liabilities that remain unpaid as a result of the Covid period. They will be looking to compromise these in a CVA as opposed to deferring (given the current government measure have provided a moratorium from landlords taking action but have not said the rent is not owing), this will significantly strengthen the balance sheet of the business.
In the post-pandemic environment it is likely that many sites will not be sustainable under current rental agreements. It is likely that many sites are over-rented and therefore a CVA can move the rent to market rent or turnover rent. A CVA can also allow the company to come out of non-performing sites.
Are CVAs the beginning of the end for a company or are they a genuine solution?
Some distressed retailers who turned to CVAs may have been accused of merely “kicking the can down the road” and taking advantage of a short-term solution that didn’t tackle the more complex underlying issues that the business faced. Addressing the root cause of prior performance is still central to the success of any future strategy, however, this has been magnified during the pandemic by shifts in consumer behaviour and trading conditions. A CVA is not a course of action that any retailer will take lightly however, it does provide an opportunity to right size and re-establish the business by re-basing costs and regaining control.