What is the issue?
These zombie companies are not only a curse on landlords, but also place solvent retailers at a disadvantage.
CVAs were intended to be a process whereby creditors as a whole can voluntarily decide to support the restructuring of a business, reducing its liabilities to support its survival, and where all creditors benefit through greater recoveries than are likely from administration and liquidation.
A CVA requires 75% in value of unsecured creditors to support a CVA (and not opposed by more than 50% of independent creditors), the idea being that all unsecured creditors are treated equally.
The mutated CVA, as adopted recently, does not treat all equal ranking creditors equally. It specifically targets landlords, but uses the unaffected unsecured creditors to get 75% acceptance.
The key role of the CVA adviser has become to cram the landlord’s collective claim down to less than 25% of the voting creditors, and to ensure they get no effective say in the process.
This is inequitable and against the spirit of the CVA legislation.
The insolvency community has cynically applied a positive concept, intended to preserve jobs and encourage entrepreneurship in the UK, to become a tool that benefits existing shareholders and secured creditors, who in turn may have bought distressed debt cheaply.
The test for a CVA
The property industry should be asking for an urgent review of the CVA legislation to ensure that all unsecured creditors are genuinely treated equally, and that no sub-group of unsecured creditor is materially disadvantaged opposite others.
We should also ask that companies proposing a CVA have to meet certain prescribed tests in terms of transparency and shared risk/consequence as part of a CVA proposal.
I would suggest that these include:
- up-to-date accounts at time of CVA
- pro-forma balance sheet and projected P&L post-CVA
- fully costed turnaround plan with third-party validation that the turnaround is credible
- individual store trading figures provided to allow analysis of true rent affordability on a shop-by-shop level, and transparency that landlords are being treated fairly
- a structure whereby the shareholders and other creditors are also taking a reduction in their liabilities and/or committing genuine fresh risk capital (this should not be a senior secured equity cash injection that ranks ahead of other creditors, as proposed in many CVAs)
- a clause whereby any landlord has an option to take back a lease immediately post-CVA – this should apply to stores that are not having rent reductions as well as those that are. This would create a disincentive to tenants trying to cherry-pick stores, they could find they lose good stores in addition to dropping bad ones. It would hopefully mean that only companies in genuine distress would risk a CVA
- that any store where the rent is reduced is no longer deemed to have security of tenure within the Landlord and Tenant Act 1954. This would give a landlord the option to recruit a better tenant at a genuine market rent in the future
These steps would facilitate genuine corporate restructurings, which is a key part of fostering a true enterprise culture in the UK, while stopping the current practice of rather cynical ‘non-restructurings’ that prejudice one creditor class (landlords) while failing to address genuine corporate failure risk.
Stand united against CVAs
The property community needs to urgently request that government reviews the way CVAs are being used.
However, before we can credibly do this, we must start to oppose CVAs en masse.
There is a quandary here in that landlords with ‘Category A’ stores that are unaffected by a CVAs need to stand with their fellow property investors, whose rents are falling and leases being negated, and object to the process in principle, rather than merely serving their own short term interest.
If we do not stand united then the CVA bandwagon will roll on and it will be increasingly used by non-insolvent businesses to shed liability for leases.
This undermines the value of a lease, disadvantages reputable and solvent businesses and ultimately the investment characteristics of real estate as an asset class—just think what a WeWork CVA would do to the London office market.
Retailers such as PoundWorld may simply be following poor precedents used by others but, as it stands, fails to meet the criteria set out above.
Is this CVA an opportunity for landlords to say ‘enough is enough’?
It probably won’t stop the CVA being approved, but it would be the first step towards addressing what has become an increasingly inequitable process.
After all, the industry cannot meaningfully lobby for change when a large group of landlords allow the undead to walk among us.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
Following a career in property banking, Morgan Garfield established Ellandi with Mark Robinson ten years ago. Morgan now leads the business, specifically focusing on fund-raising and structuring ventures with Ellandi’s partners. Morgan is a leading expert on retail property finance and a regular contributor to magazines such as Estates Gazette.
Ellandi are the UK’s leading investor in Community Shopping Centres with over 30 schemes across the Great Britain and Northern Ireland valued in excess of £1bn.