With many retailers struggling to cope with the effects of COVID-19 on their revenues, there has been an increase in businesses applying for Company Voluntary Arrangements (CVA). New Look and Virgin Active are two examples of businesses that have chosen this business recovery route, with the aim of cutting rental costs.

Whilst this is helpful for struggling retail who may need support in the current market, CVAs can have a range of negative impacts for landlords. From cutting off rental income in an already challenging period, to further straining the relationship with tenants, CVAs can leave landlords facing uncertainty from slashed rental income streams.

As a result, not every landlord agreed with New Look and Virgin Active's terms, leading to two High Court battles.

Business vs landlord

With this being New Look's second CVA in three years, many landlords were left concerned that their voices were going unheard and that these decisions were setting a 'dangerous precedent' for other businesses. As a result, although the majority of the clothing brand's landlords agreed to the CVA, others decided to appeal the decision. A number of Virgin Active's landlords also took a similar view to the terms agreed in the gyms group's CVA, launching their own appeal.

For both businesses, landlords voiced fears over a lack of transparency, accusing the brands of abusing CVAs as a simple way to cut down on rent and write off rent arrears. They believed the CVAs represented a bias against property owners, with the business giants squeezing profits at the expense of landlords, rather than acting out of necessity.

In the same week, both New Look and Virgin Active won against the appealing landlords, enabling them to continue to take advantage of the flexibility that their respective CVAs offer. By ruling in favour of the tenant businesses, the courts have signalled that they are currently the priority, rather than their landlords.

Are CVAs more than a tool for survival?

CVAs have become more ambitious in their aims over recent years, and these rulings against landlords show that tenants are continuing to push their limits. By continuing to divide landlords into several different categories, A-E with E being the lowest in terms of levels of recovery in the CVA, the majority of landlords will be disadvantaged. It is notable that all category B-E landlord creditors in the Virgin Active case voted against the CVA. The pandemic has led to a rescue culture developing, arguably with the needs of businesses put above those of individual landlord creditors in this context.

Now that non-essential businesses are open once more, this may begin to change, but for now, these rulings act as a green light for insolvency practitioners to push CVAs further, making them an increasingly powerful tool for tenants. It could even lead to the threat of CVAs being increasingly used as a bargaining chip in landlord and tenant negotiations.

There are some countervailing forces with recent cases allowing landlords to recover debts at court from tenants which are not subject to an insolvency regime. However, for landlords, the use of CVAs is another blow in an already difficult retail market. It shows that the courts may accept the view of the majority of creditors even if others take the view that this seems to unfairly prejudice other parties.

A continuing trend?

The popularity of CVAs among struggling retailers has grown quickly in recent years, and the confidence that these rulings will provide businesses means this is likely to continue. As the economy improves, this trend may reverse, but in the meantime, all parties should aim to cooperate in order to reach an agreement that is fair for all.

A recent update

Since the decisions made in the above to cases there has been a third case determined by the High Court which may be a small beacon of light for landlord creditors.

The High Court has recently revoked a CVA entered into by Regis UK Ltd on the basis that it left the shareholder unimpaired and unfairly prejudiced landlord creditors. As part of their CVA, Regis sought to categorise their sole member ("IBL") as a critical creditor and to permit their debts to be repaid in full under the CVA. This would clearly have a large impact on all other creditors with some landlords only being entitled to receive a dividend of only 7% on their claims.

The court therefore held that revocation was the proper course of action, despite it being of little practical effect in this case with Regis most likely being unable to pay the landlord's costs.

The above decision together with permission to appeal having been granted in the New Look decision discussed above it is likely there will be more decisions from the court on the use of CVAs and restructuring plans and their impact on landlord creditors.

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