CVAS can be helpful but they have their pitfalls

Struggling businesses often have to turn to these for breathing space, finds Kirsten Partridge

In today’s challenging retail sector, company voluntary arrangements (CVAS), are back in the spotlight as some prominent high street names are being forced to restructure their businesses.

If agreed by the creditors, a CVA effectively allows a company to defer and/or reduce its debts.

In March, fashion retailer Blue Inc implemented a CVA, asking its landlords and lenders to help it avoid going under by reducing rent bills and cutting other debts. All this came about less than three years after the business was due to float, with a £600 million price-tag. We have also seen several large retailers including BHS, Austin Reid, JJB and Blacks pursuing CVAS in attempts to restructure their businesses, with varying degrees of success.

In some cases, a CVA gives a business breathing space to restructure for the long term while enabling creditors to recoup at least some of the debts. In others, it can serve as little more than a stay of execution.

CVAS have specific repercussions on commercial property landlords who, like other unsecured creditors, generally end up bound by them even if they vote against the proposal. The majority of the value of a landlord’s votes will be based on the tenant’s future obligations, such as dilapidations payments, which is difficult to determine. These unascertainable claims are normally given a nominal value so landlords have less voting leverage than other creditors and if several landlords are in the same position (with low voting rights), it might prove difficult to achieve the required 25 per cent to vote against the proposal.

An approved CVA can significantly vary the terms of a lease. Variations range from reductions in rents or writing off/reducing arrears to shortening the term of a lease or removing break options or forfeiture rights. In most cases, however, CVAS haven’t been used by retailers to such an extent and have tended to focus on restructuring their rent obligations.

CVAS can be used to bring leases to an end early, leaving landlords with costly vacant units which, in Scotland, incur 90 per cent business rates charges after just three months. Landlords then find themselves “on the hook” for business rates.

Given the threat they impose, it’s vital landlords seek legal guidance quickly when their tenant is moving towards a CVA. Retailers only need to give 14 days’ notice of the meeting where the proposal will be voted on.

Once notice is received, it’s crucial the terms are carefully reviewed to determine the impact on the particular property or properties owned by a landlord, remembering the alternative might be a more final form of insolvency.

If the CVA gets approval, procedures must be carefully monitored as any irregularity in the process could give a landlord the right to raise a challenge, including one over the valuation of their financial claim. This must be done within 28 days of the agreement being approved.

Where CVA terms are not appealing but look likely to be agreed, a landlord might also consider taking action to recover the property in advance of the approval, although this option might not be available where the retailer is already in administration.

In the changing age of retail where consumers combine shopping with other leisure experiences like eating and entertainment, it’s important to recognise the potential for landlords to benefit from a CVA.

It can provide an opportunity to diversify an offering, making it more appealing to other prospective tenants who fit the new model. Wellarranged CVAS will also often allow landlords the ability to take the premises back if they find a new tenant under better terms. Kirsten Partridge is a Partner and real estate specialist at CMS