Are landlords fairly treated in CVAs?

The company voluntary arrangement is an insolvency process that has raised serious concern among commercial property owners in recent years about their use by tenant companies. The CVA mechanism has been used to change lease terms, write off arrears and recalculate future rental liabilities. This has left some property owners feeling that they have been unfairly targeted by CVAs, particularly in the retail and casual dining sectors, to the benefit of other creditors. These concerns form the backdrop for a research paper commissioned by the Insolvency Service and published on 28 June 2022. “Are landlords equitably treated, compared to other creditors, in large business CVAs?” was the key question, to which the answer was “broadly” yes. But what are the details behind this conclusion?  1. Landlords are almost twice as likely to have their rights compromised in a CVA than any other class of creditor In the sample set of CVAs that the researchers reviewed, property owners were compromised in 93% of cases. The next most compromised class was intercompany creditors at 51%. 2. Average compromises for property owners compare “favourably” with other creditors A key reason for the conclusion that property owners were “broadly” treated equitably when compared with other creditors, was that they were subject to an average compromise of 43% as compared to 44% for non-critical trade creditors, 48% for inter-company creditors and 39% for local authorities.  3. The level of compromise for property owners may be significantly higher than the report suggests As the researchers acknowledged, the report “does not tell the full story” as it focuses solely on the compromise of future rents and not on other losses suffered by property owners. Other losses would include conversion to turnover rents and the compromise of rent arrears, service charge and dilapidations. 4. The impact on property owners is skewed by unimpaired “Category A landlords” The average compromise for property owners was 43%, but “this is an average across all landlords, including those whose debts were not compromised”. The average across compromised Category B, C and D landlords was 64%. 5. The dataset is small  According to the report, 747 companies proposed CVAs during the target period of 2011 to 2020. The researchers only looked at “large” businesses in the retail and food and beverage sectors, reducing the number to only 82. From these, 59 CVA proposals were analysed. Of these, the researchers (a firm of financial consultants) were themselves involved in the production and/or supervision of 8 (or 14%) of the proposals. No CVA proposals were considered for the years 2011, 2013, 2014 or 2015. 6. The impact of vote discounting was not considered  According to the report, one of the key “checks and balances” in place to ensure that CVA proposals are equitable, is that 75% by value of creditors must vote in favour for a proposal to be approved. The researchers found that the proportion of creditors approving the proposals was generally 85% or more of those voting. They concluded that this “suggests that landlords probably offer their support, given that landlords generally account for a large proportion of the claims for voting purposes”. However, this overlooks the fact that property owners’ votes are typically heavily discounted, sometimes by as much as 75%. This was found to be an irregularity in the recent case of Carraway Guildford (Nominee A) Ltd v Regis UK Ltd [2021] EWHC 1294 (Ch). 7. “Vote swamping” was not considered The report does not break down the votes for CVA proposals to see how many were approved on the strength of unimpaired and/or non-property owner creditors voting in favour. This should be a key consideration given the recent judgment in Lazari Properties 2 Ltd v New Look Retailers [2021] EWHC 1209 (Ch); [2021] PLSCS 96 that: “There would be strong grounds to conclude it was unfairly prejudicial where a CVA, which compromises the claims of a sub-group of creditors, is achieved only because of the votes of large swathes of creditors who are unaffected by the CVA.” Unfortunately, the researchers did not undertake an analysis of creditor votes because “it was not within the scope of this research”.  8. But it might be the subject of a future consultation  The researchers do suggest that any proposed change in the law to exclude uncompromised creditors so as to avoid vote swamping should be the subject of consultation with stakeholders/industry. 9. CVA proposals are long and impenetrable According to the researchers, CVA proposal documents were “extremely lengthy and legalistic”, some up to 300 pages long. Even their “own CVA experts struggled at times to fully understand the returns to the various classes”. They recommended executive summaries, standardised tables and the inclusion of post-CVA balance sheets. 10. Greater consultation recommended The researchers recommended a change to insolvency guidance to require company directors and their nominees to consult with the British Property Federation, on behalf of their property owner members. If implemented, care will be needed to avoid the potential for misuse, given the experience in Regis where the nominee was criticised for siding with the company in its “negotiation tactics” with the BPF in advance of the CVA. The full picture The report may conclude that property owners are treated “broadly” equitably when compared with other creditors, but you have to look behind the headline. It confirms something that will come as little surprise to property owners: that they are far more likely to be compromised by a CVA than other classes of creditor. The key finding that compromises imposed on property owners are broadly in line with other creditors does not tell the full story either. The report focuses solely on the compromise of future rents; other losses are left out of the equation. And the researchers assume that property owners have large claims and so their votes must take up a large proportion of those voting in favour, but this ignores the fact that property owners’ votes are often very heavily discounted. Mathew Ditchburn is a partner and head of real estate disputes at Hogan Lovells