The abuse of CVAs must end

COMMENT Here’s a harsh reality. Legislation aimed at protecting the UK’s small businesses and enabling economic partners to create and support viable solutions to problems has been designed in a way that leaves it wide open to abuse and to the unfair prejudice of a single class of creditors. A second harsh reality: it will take years to make meaningful change to UK insolvency legislation, and in the meantime we are seeing ever greater CVA abuse. Property owners will need to stand united to mitigate its impact on our sector’s future. More on that later. First, let’s rewind to the middle of 2019. The writing seemed to be on the wall for the “landlord” CVA, where only property owners are compromised yet other largely unaffected creditors approve the arrangement. The BPF had worked to tackle one of the most egregious features of CVAs at the time – by securing acceptance among the insolvency sector that the arbitrary 75% discount applied to property owners’ claims for voting purposes, which significantly reduced property owners’ ability to affect the outcome of a CVA, should be reduced to 25%. This shift was coupled with an increase in the number of CVA challenges by property owners, and the Debenhams CVA ruling in which it was made clear that CVAs could not be used to compromise property owners’ future rent below market level. Subsequently, CVAs lost their appeal – particularly among those businesses that simply wanted to exploit the process at the expense of property owners, and the pensioners and savers we represent. By the fourth quarter of 2019, “landlord” CVAs had effectively stopped. Then Covid-19 struck and a reversion to bad CVA practice unfolded. Economic partners In 2020, there have been 33 “landlord” CVAs – triple the number we had the year before – and there will no doubt be more in the first half of next year. The pandemic brought into sharper focus which businesses have invested, innovated and adapted to changing consumer behaviours. Those that have not done so have found their resilience wanting in the wake of Covid-19 and have become increasingly desperate to again find ways – including the CVA process – to bear the cost. Let’s be clear – high street businesses and in particular the hospitality and leisure sectors have suffered a devastating 2020 and need the support of their landlords to survive. But abusing the insolvency process to protect themselves at the expense of their creditors is unacceptable and should not go unchallenged. You might be surprised by how many of our tenants would agree. They share the view that it is fundamentally unfair that their competitors in less well-run businesses end up walking away from obligations and unilaterally re-writing their contracts. They know that if retailers want modern retail environments and vibrant town centres in the future, then property owners must have the ability, and be incentivised, to invest and create the buildings that will continue to be their physical shop window, and to curate the places where they really connect and build relationships with their customers. Property owners and retailers are economic partners. Our investment underpins the social and economic fabric of our towns and cities, and will be fundamental to the UK’s recovery. Our tenants bring our buildings to life and generate the sense of place and the economic activity that enables town centres to thrive. Time for government to act So what can we do to tackle the abuse of CVAs here and now? The BPF will continue to work as closely as possible with insolvency practitioners on individual CVAs, to ensure they are as transparent and fair as possible, and we will call out those that have failed to meet our standards. Expect property owners to look more closely at individual CVAs, even as we await the progress of legal challenges already in train in relation to the New Look and Regis CVAs. We have also been working behind the scenes over the past few years to build support for changes to the framework – known as SIP 3.2 – that formally guides the insolvency sector’s approach to CVAs. These changes include for example the need for objectivity from an insolvency practitioner, to explain why different creditors are treated differently, and to provide creditors with enough time to consider proposals and sufficient information to evidence the business’ financial projections. We hope that these changes will be endorsed in updated guidance published early next year and that they will be well supported by responsible insolvency professionals who care about the integrity of their role. Action by government remains the ultimate goal. Legislative change is required to put an end to situations such as wealthy individuals and private equity backers taking value out while shifting on to property owners the cost of years of failings and underinvestment, and to put an end to the permanent rewriting of contracts without any court oversight. Abuse of CVAs hurts UK pensioners, taxpayers and savers, who own the majority of this nation’s commercial property. When property owners are targeted in CVAs, it is the public that ultimately bears the cost of this abuse, and the public’s cash that ends up being transferred to the owners of CVA businesses. While we continue to support a rescue culture, CVAs have become fundamentally inequitable. CVAs are damaging the high street, hurting pensioners and savers, and undermining the UK’s reputation as a world-class investable proposition. Failure to challenge abuse, and to put it beyond possibility through legislative action, will come at great cost to all of us. Melanie Leech is chief executive of the British Property Federation