How to spot the CVA warning signs

It has been a bumper year for company voluntary agreements, write Chloe Meredith and Jordan Walsh, associates at Ashurst LLP, but what do they mean for landlords? A number of high-profile company voluntary arrangements (CVAs) have seen 2018 styled as “the year of the CVA”. House of Fraser, Mothercare and New Look have all made use of this insolvency process, which furthers the rescue culture and involves a compromise arrangement between the company and its creditors, but often leaves landlords with heavily reduced rents and empty properties. Many landlords feel aggrieved at what is sometimes seen as an unfair process, which leaves them with little control compared with other creditors. So what are some of the things that landlords should be aware of when it comes to CVAs? What to look out for Frequently, a landlord will not know that their tenant is in financial difficulty until the insolvency process has already begun. By that point, it will be more difficult for a landlord to mitigate its position. In the case of a CVA, a landlord should receive the CVA proposals and a notice of the creditors meeting at least 10 days before the meeting. However, there are a number of warning signs that a landlord can look out for so that it is forewarned of its tenant’s financial situation (and has had the opportunity to take advice on its own position) before the CVA proposal arrives. The most obvious sign for a landlord that a tenant may be in financial difficulty is the persistent late payment of rent or a build-up of rent arrears. Late payment and arrears are likely to indicate cash-flow issues. Any communications with the tenant concerning arrears are likely to amount to a waiver of the landlord’s right to forfeit, but where forfeiture is not the desired outcome, the landlord should use the late payment of rent as an opportunity to communicate with its tenant and bottom out the extent of the tenant’s problems. A tenant with liquidity problems may ask to pay rent on a monthly rather than quarterly basis. While this may be a reasonable concession to make, landlords should document such arrangements with care. The landlord will want to avoid inadvertently varying the terms of the lease or agreeing a termination clause that amounts to an unenforceable penalty. A common precursor to insolvency proceedings is the restructuring of the tenant or the tenant group. For example, rights issues may indicate a shortage of capital. Profit warnings are a further signpost if the tenant is a listed company or part of a listed group. A profit warning indicates that the company’s quarterly financial results will be significantly down on the previous quarter or that it expects to make a loss. Another source of information is the tenant’s financial statements and directors’ reports. The directors are obliged to consider in their report whether the company can continue to trade as a going concern and financial statements will show how the tenant is performing. Monitoring and information gathering Spotting the warning signs is not always easy. While a profit warning is likely to make the news, many other factors won’t. Developing and maintaining a good relationship with the tenant makes it far more likely that the tenant will be frank with the landlord when it hits on hard times. But there are other things a landlord can do when a tenant is less forthcoming: ■ Use the “follow” function on the Companies House website. This will send an email notification as soon as the company makes a filing there. ■ Set up targeted press alerts so that the landlord receives a notification each time an article is published which includes chosen key words – for example, a combination of the tenant’s name and the word “loss”. ■ Run a credit check against the tenant for an independent assessment of their creditworthiness. Spotting the warning signs allows landlords to take advice and act early to protect their own investment. Options available to landlords once a CVA has been approved A landlord’s options to protect its position are very limited once a CVA has been approved. For instance, a landlord will usually not be able to sue for rent, nor utilise the commercial rent arrears recovery (CRAR) process in order to seize the tenant’s goods for sale. Further, the terms of the CVA may prevent forfeiture of the lease. However, in some situations, a landlord may be able to pursue a guarantor or former tenant, divert the rent of any sub-tenant, or draw down on any rent deposit. They might also be able to forfeit the lease in certain circumstances if it provides for such a right. All of this will depend on the terms of the CVA and the underlying contractual documents, so independent legal advice should always be taken. Landlords should review the terms of the CVA carefully and remain alert to evolving circumstances. A CVA can quickly transition into administration, as demonstrated by the demise of companies such as Toys R Us and BHS. The emergence of CVA clauses? Earlier this year, fashion retailer Next provoked controversy when it suggested it would seek renegotiation of its leases to allow for the introduction of a “CVA clause”. Such a clause would require landlords to agree rent reductions on stores should neighbours located nearby benefit from a similar deal through a CVA. This is reflective of an environment in which tenants feel emboldened to do everything they can to reduce their rent bill. Landlords should be conscious of this potential shift in power dynamics as leases come up for renewal, particularly with regard to tenants with short leases of around five years. 2018 has been a big year for CVAs and their use (some would say abuse) looks set to continue amid ongoing disruption to the British high street. Warning signs ■  Arrears or late payment ■  Monthly rent payments ■  Tenant restructuring ■  Profit warnings ■  Negative financial statements Main image © Westend61/Rex/Shutterstock