What is a CVA?
CVAs are an out-of-court statutory insolvency procedure through which a firm can compromise both current and future debts owed to unsecured creditors, usually for a period of three-years. They are significant for property owners because the terms of a CVA often include a reduction in future rent obligations in accordance with a categorisation of stores by profitability. CVAs are also used to write down rent in arrears or exit unprofitable stores.
In order to undertake a CVA, a firm need not actually be insolvent but it does need to gain the consent of a least 75% of unsecured creditors by value. If approved, the terms of the CVA then bind all creditors, including those dissenting.
CVAs have traditionally been used by small firms yet in recent years many of the UK’s largest retail, hospitality and leisure firms have looked to them as a means through which to restructure.
What to look out for in a CVA
CVAs can be extremely lengthy documents and often prove daunting for even the most experienced property owners. The BPF has therefore put together a list of the ‘Top 10’ key points that creditors should identify and consider before voting.
The company’s financial position and an explanation as to how it arrived at that position should be clearly articulated in the CVA proposal, particularly the statement of affairs and whether the company is insolvent.
What is likely to happen to the company should creditors reject the proposal and why the CVA is a better option for property owners than administration or liquidation, including any illustrations provided of the outcomes of those options.
Any explanation of why the business will be sustainable after the CVA, including the quantum, certainty and source of new funding.
The justification of any different treatment between different creditors and the extent to which liabilities to non-property-owner creditors are being compromised either under the CVA or otherwise.
Which premises will be closed, when will that happen and who will pay business rates after the closure.
The amount and duration of any rent reductions, whether rent reductions include payments already made by the company and whether the rent will be reviewed following expiry of the rent reduction period.
The treatment of dilapidations in relation to leases where a break option granted under the CVA is exercised; whether dilapidations are compromised and, if so, whether this includes disrepair accruing prior or during the CVA or the remainder of the lease.
Whether leases subjected to a rent reduction are given a break option, the timing of any property owner break options and the ease of operating them, including the amount of notice required and the period during which they can be exercised.
Whether there is a compromised lease fund to compensate the compromised property owners of closed premises if the company becomes profitable in the future and, if so, the mechanism for that.
What will happen if the company defaults on its CVA obligations, the circumstances in which the CVA would be terminated and the impact of termination on the rent reductions and other compromises sought from property owners under the CVA (including whether rent reductions survive termination).
On receipt of the draft CVA proposals, creditors will have time to consider and understand what the CVA potentially means for their business. Creditors should take the opportunity between receiving the draft proposals and the creditors meeting to ask the nominee some key questions relating to the CVA.
Further guidance for creditors
The BPF have produced a CVA Creditor Document, which clarifies the CVA process further and sets out the information that creditors should expect to receive prior to the CVA creditors meeting. Within this document, there is a “Landlord Creditor’s Request for Information” sheet, which is intended to be a standard document that property owners can provide to insolvency practitioners on receipt of a CVA proposal if they do not feel they have been provided with the requisite information.
BPF’s public policy work on CVAs
Done well, CVAs can be a good way to turn around a failing business, but over the last few years, the BPF have grown concerned about abuse of the CVA process allowing businesses to cut property costs without further investment or a credible turnaround plan, resulting in value passing from property owners to the shareholders of the business.
Our briefing on CVAs sets out how CVAs are making investing in town centres more difficult and undermining the UK’s reputation among international investors. It also lists our recommendations for government, with a view to making CVAs more transparent, more effective and clearer for creditors.
The BPF Insolvency Committee
The BPF strongly encourages businesses considering a CVA and their advisers to engage with its Insolvency Committee in confidence at an early stage in developing proposals. These engagements allow property owners to comment on the CVA and suggest improvements that could increase property owner support. This engagement never represents “approval” or “endorsement” of a CVA by the BPF – it is for individual property owners to decide how they vote on a CVA.
The CVA Red Flags
The BPF has a list of CVA red flags, which are features and terms of CVAs that property owners will generally find objectionable and speak out about in creditors’ meetings. A list of our red flags is here. Property owners affected by a CVA are recommended to check whether a CVA proposal contains red flags and if so, the BPF expects that a property owner will normally find it difficult to support such a CVA.