Government CVA report underestimates impact on landlords, says BPF

A government-commissioned report has found that landlords are treated “equitably” in company voluntary arrangements – a finding that has sparked heavy criticism from the industry. As previously revealed by EG, the Insolvency Service appointed consultancy RSM earlier this year to undertake research into how landlords are treated in CVAs, in an effort to understand how they are considered compared with other creditors during the process. The analysis, published today, concluded that landlords are broadly treated “equitably” in CVAs. However, it recommended simplifying and standardising lengthy and complex CVA proposals, as well as disclosing more financial details including forecast profit and loss accounts and cash flow for the duration of the restructuring.  The report also advised that key trade bodies, such as the British Property Federation, should be consulted as early as possible in the process to minimise the risk of unfair outcomes for affected property owners. Melanie Leech, chief executive of the BPF, (pictured) said the organisation supported those findings and that an analysis of high street retailers’ use of CVAs was long overdue, but “did not understand” the notion that landlords are treated fairly in most cases. Leech added that the report demonstrated the need for reform. She urged the Insolvency Service to bring this forward to improve fairness in the insolvency regime, as well as support the government’s “efforts to attract private capital into high streets and town centres and deliver on its levelling-up promise”. “There is no getting away from the fact that almost all of the CVAs analysed impacted property owners, almost double the number of cases that affected trade creditors. It is no wonder property owners have felt singled out in these proposals,” said Leech. “The report argues that property owners, on average, did not suffer a worse financial compromise than other affected creditors but this does not tell the whole story. “A landlord’s voting rights should be determined by the value of its debt, together with the unexpired elements of the lease. One of the fundamental issues is the arbitrary discount often applied to the value of any future rent, over and above a valuer’s best estimate, that artificially reduces landlords’ voting right[s] and their ability to influence the shape and outcome of CVAs. “Also, as the report acknowledges, a top-line cut to rent is not the only financial penalty suffered by property owners, who have increasingly been asked to shift to turnover-based leases, forfeit service charge payments and become liable for business rates. Property owner compromises seem very likely to have been even higher than the report suggests.” Mathew Ditchburn, partner and head of real estate disputes at Hogan Lovells, said the finding that compromises imposed on property owners are broadly in line with other creditors “does not tell the full story”. He noted that the report did not factor in losses beyond the compromise of future rents that property owners suffer, such as conversions to turnover rents and the compromise of rent arrears, service charge and dilapidations. “Regrettably, there is no breakdown of votes for even the small dataset of 59 CVA proposals that the researchers considered, as this was not within the scope of their research and would be too ‘time consuming’,” Ditchburn added. “That is unfortunate as ‘vote swamping’ by unimpaired creditors has always been a key concern for property owners, and indeed was found in last year’s New Look case to provide strong grounds for concluding that a CVA was unfairly prejudicial. “Instead, 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.”   To send feedback, e-mail pui-guan.man@eg.co.uk or tweet @PuiGuanM or @EGPropertyNews