A big benefit of CVAs is that they allow companies experiencing financial difficulty to continue trading whilst repaying creditors.
There has been a recent rise in companies, particularly in the retail industry, which have proposed and agreed CVAs with their creditors. A CVA allows a company to restructure its debts and reduce its outgoings. House of Fraser, Jamie's Italian and Prezzo are some examples of well established companies that have recently entered into CVAs to manage debts whilst continuing to trade.
How Are Landlords Impacted by CVAs?
Where a company leases premises, a landlord will be a creditor of the company for rents and other sums payable under the lease. If the company enters into a CVA the landlord will be one of the pool of creditors hoping to recover money owed to them. The landlord is at risk of not being paid rent (arrears and future rent) if the CVA includes such terms and could be prevented from terminating the lease while the CVA is being negotiated.
What Can a Landlord do to Protect Itself?
Here are 5 practical tips for landlords to consider in these circumstances.
- Attend the creditors meeting - Before a CVA is agreed, a creditor meeting will be held to agree the terms of the CVA which will be binding to all creditors. Attendance at these meetings is not obligatory but showing up is the best way for a landlord to influence the terms of the CVA and protect its position.
- Tenant due diligence - Before entering into a lease, it is essential that the appropriate company due diligence is carried out and that monitoring of the tenant's liquidity and ability to pay rent continues throughout the lease.
- Rent Deposit Deeds - A rent deposit deed requires a tenant to pay a lump sum to the landlord in advance of taking the lease. The rent deposit will be held by the landlord for the duration of the lease. It can be used by the landlord to cover costs in the event of damage to the premises or non-payment of rent. Once a CVA has been agreed a landlord's right to draw against the deposit is often restricted by the terms of the CVA, but a deposit will be beneficial for the landlord if rent is unpaid before a CVA is proposed.
- Guarantee - A guarantee for payment of rent from parent company of the tenant or individuals connected with the tenant company can be drafted so that it would still operate where a CVA is in place.
- Manage - One potential outcome of a CVA could be the relocation of the company into smaller premises. A landlord should consider how quickly it can find a new tenant to minimise the period where it is responsible for the payment of service charges and insurance rent. Alternatively, a landlord could offer a reduced rent to the original tenant for a fixed period, allowing the tenant extra time to resolve its financial difficulties or allowing the landlord longer to find a new tenant.
Whether you are a landlord or a tenant who would like further information on CVAs or the effect of company insolvency on your lease, please contact Georgina Little in our Commercial Propety team on 0117 314 5348