CVAs – friend or foe?

The past week has been frustrating for landlords, with the High Court rejecting a landlord challenge to New Look’s CVA (Lazari Properties 2 Ltd and others v New Look Retailers Ltd and others [2021] EWHC 1209 (Ch)) and days later sanctioning Virgin Active’s restructuring plan (Re Virgin Active Holdings Ltd and others [2021] EWHC 1246 (Ch)). A victory of sorts has since been achieved in the Regis CVA (Carraway Guildford (Nominee A) Ltd and others v Regis UK Ltd and others [2021] EWHC 1294 (Ch)), with the High Court ruling that the CVA, which has since terminated, was unfairly prejudicial against landlords on one discrete ground.  Although the current momentum appears to be with the commercial tenants, the pendulum could yet swing the other way, with news that New Look’s CVA landlords have just won permission to appeal the High Court’s rejection of their challenge. However, taking all these events into consideration, should we now expect a wave of so-called “landlord CVAs”, where the only creditors compromised are landlords?  The answer is no, not necessarily. In fact, some have even speculated about whether CVAs might fall out of favour. The latest Insolvency Service figures indicate that CVA numbers in the first quarter of 2021 were down in comparison to the same period last year, although this was also true for other company insolvency procedures and reflects government pandemic measures designed to help businesses. Moreover, some companies are now undertaking operational and balance sheet restructurings via a restructuring plan under the new Part 26A of the Companies Act 2006. This has the potential to pit landlords against secured financial creditors in a single restructuring, with the risk of “cross-class cramdown” even if landlords in one or more classes vote against. Virgin Active and NCP have each sought to compromise their lease liabilities in this way rather than using a CVA.  However, the restructuring plan is a heavily court-based procedure best suited to larger companies. And, given the volume of rent arrears accumulated by the UK’s high street over the past year, more CVAs will inevitably follow. All eyes are focused on 30 June – when the ban on evicting commercial tenants for non-payment of rent is scheduled to end – but, even if that date gets moved, at some point commercial tenants will need to find a way to discharge their rents unless the government introduces further measures following its recent call for evidence on the unpaid rent bill. For many, reducing rents via a CVA will remain an attractive proposition. How should landlords react when faced with new CVA proposals?  Invariably, some landlords are not compromised under CVAs, except for waiving rent arrears and accepting rent on a monthly rather than quarterly cycle; such landlords may have few gripes.  However, for compromised landlords (ie those whose future rent is reduced), the obvious answer might be to challenge a CVA through the courts. But such challenges rarely succeed. There must be either unfair prejudice or a material irregularity, which is difficult to bring, as illustrated by the New Look challenge. Discovery (Northampton) Ltd and others v Debenhams Retail Ltd and others [2019] EWHC 2441 (Ch); [2019] EGLR 47 was a rare example of a CVA challenge succeeding on one (but not all) grounds, but where the outcome was to strike out the offensive parts leaving the modified CVA in place.  Can landlords benefit from CVAs? Importantly, CVAs do often have features that landlords may benefit from. First, it is common, as Drake & Morgan is seeking to do under its CVA proposal, for tenants to move compromised rents to a turnover model. In return, landlords are typically given a break right.  Breaking a lease in the current market sounds counter-intuitive, but some businesses are reported to be looking for new premises. The risk is that a landlord exercises its break option on a property the tenant wants to keep (forcing it to approach the landlord to renegotiate). In the absence of having a new tenant lined up, a landlord might choose to exercise a break to repurpose the asset for other uses (eg other commercial uses through new Class E or residential use under permitted development rights) or simply to upgrade it. During break notice periods, rent is usually payable at the contractual rather than CVA rate. Conceivably, a landlord might find a new tenant while receiving contractual rent in the meantime.  Secondly, companies often look to exit their worst-performing sites via a CVA. The New Look CVA provided the company with termination rights on its Category B sites (where net sales fail to return to a specified percentage of pre-pandemic sales) and Category C sites (on 60 days’ notice). But as Mr Justice Zacaroli noted, a CVA can offer a landlord the opportunity to accept the surrender of a lease, but it cannot oblige the landlord to do so. Until the landlord accepts a surrender, the lease remains so that the liability for business rates and other costs, such as utilities, remains with the company. A landlord might, therefore, hold off accepting a surrender until a new tenant is found to avoid incurring such liabilities itself.   Are there any other options?  It is worth noting some recent wins for landlords outside the context of CVAs. The courts have given summary judgment for the landlord claimants against The Fragrance Shop and separately against Sports Direct, Cineworld and Mecca Bingo for unpaid Covid-19 rents. This enables the landlords to use other enforcement tools, such as a third-party debt order or writ of execution, entitling them to appoint a sheriff to seize assets up to the value of the judgment. Although perhaps not as immediately attractive as a statutory demand/winding-up petition, it does provide landlords with at least the ability to seize the initiative while other remedies, such as forfeiture and winding-up petitions, are temporarily unavailable.  Ultimately, the main limitation of CVAs is their lack of an automatic moratorium. So, unless the company takes other steps to obtain such protection, a CVA may not, for example, prevent a landlord from seeking summary judgment for unpaid CVA rent during the term of the CVA. Tim Carter and Helen Wheddon are partners at Stevens & Bolton LLP Image © Jack Dredd/Shutterstock