Will the end of the moratorium on evicting commercial tenants in March prompt more CVAs?
With the moratorium on forfeiture of commercial leases for non-payment of rent set to expire on 31 March, many tenants will be working out how to pay their rents. Using a company voluntary arrangement (CVA) may offer one way of compromising rents if landlords decline to negotiate a rent reduction.
But the road towards a CVA is not without its potholes, and there are two key signs that landlords are growing increasingly savvy when reacting to them.
Firstly, CVAs often reduce rents in return for giving landlords enhanced break rights. The idea of landlords breaking leases in the current market sounds counterintuitive. However, depending upon the property, a new tenant may be found that is willing to pay more.
Secondly, many companies seek to use CVAs to exit their worst performing sites. This is where CVAs sometimes come up short, as landlords may need to accept a surrender or assignment of the lease before the tenant can walk away from all liabilities associated with such leases. Landlords may hold off doing this until a replacement tenant is found, potentially keeping the tenant on the hook for business rates in the meantime.
Whilst the majority of recent high-profile CVAs have sailed through relatively painlessly, obtaining the requisite creditor majorities to approve a CVA is certainly not guaranteed. Moreover, to rebut any unfair prejudice challenge, a CVA needs to satisfy the “vertical test” (demonstrating that creditors will do better under the CVA than under the most likely alternative - either administration or liquidation).
The Caffe Nero CVA is one example where talk of a takeover bid for the company prompted questions as to whether the CVA really was the company’s best option. Furthermore, properly advised creditors may seek to interrogate much more closely the supposed downsides of the ‘insolvency counter-factual’. One big advantage of a CVA for tenants and their shareholders is that it enables them to circumvent – or postpone – the scrutiny of directors’ past conduct and of potentially reversible transactions that would be carried out by an insolvency officeholder if the tenant were to enter into administration or liquidation. Yet this lack of scrutiny may not be in the creditors’ best interests.
The return of Crown preference from 1 December last year may dampen some enthusiasm for CVAs. It bumps HMRC up the insolvency waterfall, ranking it as a secondary preferential creditor for certain tax liabilities (including VAT, PAYE and employee NICs). Since secured and preferential debts cannot be compromised under a CVA unless the relevant creditor consents, this may mean there is less in the pot for unsecured creditors.
Where does this leave the CVA? Given the continuing high street woes, we can expect more to follow. However, those who use them must weigh up their merits carefully, especially bearing in mind the new restructuring tools introduced by last year’s Corporate Insolvency and Governance Act 2020.
First published in CoStar, see here. Republished with permission.