Landlord affected by CVA – Should I Vote For Or Against? Should I Even Vote?
High street names, once bastions of the High Street are using company voluntary arrangements to restructure their leases, to cut costs during the pandemic. But is this fair? Should I vote? These are just some of the questions we are being asked daily as CVA experts. Keith Steven has experience of dealing with over 500 CVA cases in 23 years, so he knows a thing or two about turnaround. We asked him to answer these frequently asked questions…..
Q1 As a landlord should we vote?
You are not obliged to vote as a creditor in a company voluntary arrangement. The CVA voting process is entirely optional. However, I believe it is important for all creditors and stakeholders to take part in what is an equitable process set out by the 1986 Insolvency Act. Yes, CVAs have been part of UK law since 1986.
If you don’t vote at all, then your vote will be deemed to be in support of the CVA because it is not a vote against. Is that the impression you want to give as a landlord? By abstaining you don’t really influence the vote against.
So, we would always recommend carefully reading the proposals put forward to you by the CVA nominee (Link to guide to the CVA process) and question the nominees or indeed the company proposing the CVA on the terms of the CVA proposals. Not many creditors are aware that they can put forward modifications to change the proposal.
If for example a CVA does not include an element of your debt, you can modify the CVA by proposing modifications. For this to have any bearing on the CVA decision making process you would have to have more than 25% of the overall votes cast.
Question 2: As landlords should we vote for or against a CVA put forward by the tenant?
That is a decision to be made on a purely commercial basis. It may depend on the proposal’s terms to deal with YOUR property and the properties and unsecured debts of other stakeholders. At this moment in time many ‘High Street’ CVAs are predicated on dealing only with the landlords’ leases for their so called dark stress (failing outlets). My view is it is not equitable to pick on one constituency for the purpose of closing stores. But this is for you, your board and perhaps investors/lenders to consider carefully.
In our view, normal CVA arrangements should include most if not all unsecured debts that the company has at ‘the line in the sand’. Remember secured debt stands outside the scheme but can influence it(**). The benefit of this for the company is it reorganises its current liabilities, excluding secured debt, in exchange for an offer to repay a dividend over a period of years or a one-off payment. We call this the X dividend over Y years approach.
By excluding debts such as non-domestic rates, employees’ debts, contingent liabilities, supply-side creditors and other short-term debt from the CVA, the company does not get the full benefit of the scheme. More importantly - in the case of Toys R’Us - HMRC brought the CVA scheme down for £15m of unpaid taxes, which were excluded from the CVA. Toys R’Us is no more on the UK retail scene.
Q3: If I vote against what happens?
This is an equitable process, if 75% or more of the eligible votes are cast in favour then the CVA is approved. If the vote falls short of that, the CVA is not approved and the company may go into administration or liquidation. Your vote may allow the CVA to be approved but your property agreement, lease or licence may be terminated by the CVA’s failure.
Q4; If we vote in favour of the CVA what happens?
As above the process requires votes to be cast either in favour, against or in favour with modifications. Your vote may allow the CVA to be approved but your property agreement, lease or licence may be compromised, or the rent reduced as set out in the CVA proposals.
Q5: We are not sure what the CVA proposal we have received means for our property, can you assist?
Our insolvency practitioners, directors and regional managers are happy to give general guidance on the CVA’s terms and what the proposals may mean for you subject to the normal caveats and client conflict relationships. Do call us on 0800 9700539
Q6: I see there has been recent case law on CVAs. What is the situation?
Recent case law regarding the New Look and Regis CVAs has not changed the situation much. Landlords are still treated as a creditor whose contracts have been compromised. That said, in the Regis case an arbitary blanket discount on their claims of 75% was regarded as unfair. It is likely then that there will fewer cases of large discounts being applied to landlords’ claims for voting purposes and, in turn, that should make it more difficult for companies to impose CVAs on dissenting landlords. It is still possible to discount landlord claims for voting purposes, but the discount must be a reasonable method for estimating a minimum value.
One of the most significant points to come out of judgments in New Look and Regis is that, where lease modifications at the landlords’ expense have the effect of increasing value for the benefit of shareholders, that benefit should be shared with the impaired landlords to avoid unfair prejudice.
What if I want to know more about CVA? Please download our CVA Experts Guide with 120 pages of information here
**Secured creditors can vote for the likely shortfall in their recovery if the company entered liquidation for example. Without relinquishing their valid security. Obviously, ALL secured creditors must be informed about the CVA process and take part in the scheme architecture.