Company Voluntary Arrangements

A CVA is a procedure that allows a company:

• To settle debts by paying only a proportion of the amount that it owes to creditors

• To come to some other arrangement with its creditors over the payment of its debts

• To propose company voluntary arrangements (CVAs) with the primary purpose of reducing the leasehold estate held by the company.

What can a landlord do when faced with a tenant’s CVA?

A landlord should certainly vote on the proposals as until the proposal is approved there is still a chance to influence the terms of the CVA, whereas afterwards landlords will be bound by the terms of the CVA regardless. The insolvency practitioner supervising the CVA is under an obligation to notify all known creditors of the plans for the CVA, so it is important to make sure that the landlord’s address for service is up to date and monitored.

The approval of a CVA proposed by the company’s creditors requires a volte in favour by at least 75% (by value) of the creditors who vote on it.

Once bound by a CVA, a creditor, including a landlord, is prevented from taking steps against the company that the terms of the CVA prohibit.  The CVA does not automatically remove a landlord’s right to forfeit a lease, but that might be included in the arrangement, together with restrictions on recovering rent through the commercial rent arrears recovery process court proceedings or by way of statutory demand. A landlord may even be prohibited under the CVA from drawing down against a rent deposit. For smaller companies entering into a CVA, there’s a statutory moratorium which has the same effect.

A CVA can affect payments due in the future from the tenant, so that a landlord might be faced with an arrangement which reduces not only its right to arrears but also to future rents. An example is provided by Prudential Assurance Co Ltd and others v PRG Powerhouse Limited and others [2007] EWHC 1002 Ch (in which guarantors used their strength as the largest creditors of the tenant to vote through a CVA which released them from lease guarantees.

If the premises let to a tenant will be closing under the terms of the CVA, a landlord should not accept the premises back before it absolutely has to. Although such CVAs now usually set aside a fund to pay the rates on closed properties for a short period, once a landlord has responsibility for a property again there will be an insurance rent and service charge void and potential effects if the unit forms part of a larger development. Nearby retail units paying turnover rents may suffer reduced footfall if units around them close, so there may be a wider rent loss to the landlord.

What will happen if the tenant does not comply with the terms of the CVA?  The terms of the CVA will deal with this in most cases and often the CVA will provide that on the debtor company’s default:

• The CVA supervisor may petition for the company’s liquidation;

• The creditors of the tenant company cease to be bound by the CVA, allowing them to pursue the tenant company for the balance of the debt due;
• The CVA supervisor must distribute any assets that he or she holds in partial satisfaction of the company’s debts.

Landlords generally and unsurprisingly regard CVAs as disadvantageous to them and the terms of future leases should be carefully considered to maybe allow for staged capital contributions by landlords rather than the payment of lump sums, the right to set off sums owed by the tenant against landlord’s contributions and initial periods of half rent rather than full rent free periods.

Landlords with guarantors for the tenants may also want to include an indemnity from the guarantor to the landlord for any losses that the landlord may incur as a result of an imposition of a CVA.