What is a CVA and how do they impact a landlord’s ability to terminate a lease?

03 February 2021

CVA stands for Company Voluntary Arrangement.

It is a legally binding agreement between a company and its creditors for the company to pay off its debts and liabilities (usually paying only a proportion of the amount that is owed) over a fixed period of time under the terms established therein.

Whilst CVAs are classed as an insolvency implement, they provide struggling business with the opportunity of recovery and better prospects for the unsecured creditors than if the company were to enter into administration or liquidation.

Importantly, CVAs allow the company to continue trading whilst repaying its debts. Also, under a CVA the directors of the company remain in control, offering them the opportunity to re-evaluate the business and implement a re-structure that could be the difference between the company failing or recovering.

CVA proposals are voted on and approved by the creditors voting by value. As such, some unsecured creditors subsequently find themselves bound by the terms of CVA that they did not favour or, in some instances, that they were not aware of until after its approval.

Such creditors may then find that the terms of the CVA are not favourable to them and may want to consider what action they can take under the CVA, if any, or otherwise.  

How do CVAs impact landlords and their ability to terminate a lease?

As mentioned above, CVAs allow the business to continue trading whilst repaying its debt. As such, the premises from which is it trading will likely continue to be occupied and rent payable to the landlord(s).

Pursuant to the terms of the CVA the company’s ongoing rent liabilities could be reduced (usually depending on the performance of that particular premises) resulting in the landlord potentially receiving rent below market value.

Landlords will then have the tough decision as to whether to remain bound by the terms of the CVA and retain the tenant, or to look to terminate the lease with a view to finding a new tenant and receiving, at best, a higher rent if not market rate.  

In making this decision the landlord will naturally have to give due consideration to the arrears, the prospects of the tenant’s recovery and the costs involved. Furthermore, they will need to consider whether there are any prospective and suitable tenants interested in the premises and their financial stability; factors that have become all the more fundamental given the adverse impact Covid-19 has had on many businesses.   

The terms of the CVA will usually dictate the landlord’ s ability to terminate the lease, setting out timescales, deadlines and prescribed forms of notice to be complied with. As such it is just as important that the terms of the CVA are considered early on to determine if and when the Landlord’s right to terminate is enforceable.

CVAs can be long and complex documents, especially if the company is a large entity with considerable debts. As such, creditors bound by the CVA looking for advice on its terms and it option thereunder should seek legal advice.

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