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How to terminate leases in a CVA

Written by Keith Steven Managing Director 24 July 2018

signature on agreement

I would like to close down one of my factories or shops as the liability is dragging the whole business down. What can I do?"

We can determine lease obligations for struggling companies

It should be noted that the CVA does not actually terminate the lease but can determine the obligations so the tenant can leave.  It is a subtle difference but important from a legal point of view.

How many companies need to rid themselves of property in 2018?  So far it seems quite a few major retailers such as - Carpetright, New Look, Prezzo, Jamie's Italian, Byron Burger, House of Fraser, Mothercare..... 

Without recourse to shareholders for capital or debt/bond facilities to ride out the storm, many larger groups are entering protective insolvency by closing stores or trying to survive by restructuring.

Fragility is the order of the day for undercapitalised companies, meeting bank covenants, meeting rent quarter days and paying VAT /PAYE when due, are impossible juggling acts to achieve when cash take at the till is below budget or sale a have fallen.

So how can KSA help a retailer or other company restructure?

Using a company voluntary arrangement (CVA) we have helped companies to exit those non performing properties and terminate the formal lease, thus crystallising the liability. Rent payments are stopped and the landlord can be prevented from taking recovery action.

How can the CVA approach work?

It is vital that the proposals are cogently structured and careful financial forecasts are prepared in support of the CVA proposal, then detailed negotiations must commence with the landlord to seek surrender or termination of the lease, if this is not forthcoming then the company should consider exiting the property before finalising/ publishing the CVA proposal.

KSA helps our clients with deal structure, turnaround management, building the proposals and forecasts, driving the deal with creditors and helping the board through the crisis. Please note that it is not generally necessary for Administration or Receivership to be used for this approach! Thus it is cost effective and powerful with negligible cashflow consequences. Stock and fixtures (as long as not landlords) can be removed and prevent loss of value.

As above many companies face a difficult future because of their lease hold obligations, normally there is no exit. However we use comprehensive and robust CVA proposals coupled with CASE LAW.

The following case law has been used for some years now to terminate leases with no cash cost to the company.

  • Re: Doorbar v Alltime Securities Ltd (1995) BCC 1149 stated that landlords can be bound by voluntary arrangements for future obligations under a lease.

  • Re: Cancol Ltd (1995) BCC 1133 that the word 'creditor' in r1.17(1) IR 86 was wide enough to include a landlord with a right to future rent i.e. the ability to include future rent extends to CVAs as well as Individual Voluntary Arrangements.

  • Furthermore, where the unliquidated or unascertained claim in a CVA involves future rents accruing to a landlord, the case of Re Park Air Services [1996] BCC 556) gives the CVA meeting chairman some considerable guidance as to quantifying the claim at the meeting.

So the process in simple terms is:

  1. Board passes resolution to propose a CVA, appoints KSA to assist the board to prepare the CVA proposals and negotiate with the landlord and other creditors.

  2. The CVA will include a specific termination clause which terminates the lease(s).

  3. KSA writes to landlord(s) stating CVA in process, company has exited the property or will exit. CVA will terminate lease(s).

  4. CVA binds the landlord into the moratorium.

  5. Landlord can vote for 12 months rent (normally) at the creditors meeting, can only vote for 1 for dilapidations claims, (Re: Newlands Seaford Educational Trust Case Number 3821 2006.

  6. CVA approved by majority creditors.

  7. Company can exit property with nil cash cost.

This is complex law and we can explain further if required, so please do not hesitate to contact us on 08009700539 or 01289 309431 if we can assist you further.

There is quite a noise in the press at the moment by Landlords saying it is unfair that companies can just dump unprofitable stores but it should be remembered that the company does need to be insolvent to propose a CVA in the first place.

Categories: CVA, What is a CVA or Company voluntary arrangement?

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