The Rise of Company Voluntary Agreements (CVAs) on the High Street
What is a CVA?
A Company Voluntary Agreement (CVA) is a legally binding agreement used to help companies stabilise and recover from financial difficulty. The CVA allows a company’s debts to be paid back to its creditors (including its landlords) over an agreed period of time.
The impact of CVAs on commercial property landlords
Despite being intended for emergency use (for example, helping a company to recover from a global pandemic), CVAs are on the rise.
When used as a restructuring strategy by large companies who were slow to move their infrastructure online, for example, the impact of CVAs on commercial property landlords has become a concern.
A variety of household names such as Caffè Nero and New Look have turned to CVAs for terminating their liabilities under their leases. Caffè Nero is negotiating a CVA which would allow 69 of its worst-performing sites to pay no rent for three years. Owners of its best-performing sites would receive turnover-based rent for the next three years.
In most cases, commercial property landlords only make up a very small portion of the total debts payable through the CVA.
This can mean that they are regularly outvoted by other creditors, suppliers or even HMRC, often bearing the brunt of the measures designed to help the company recover.
If no recovery takes place, the loss of income will ultimately be absorbed by the commercial property landlords (and their investors).
Essentially, putting a CVA in place is not necessarily the best solution to problems with commercial debt.
When is a CVA not the right choice?
CVAs are not a way to prolong an inevitable insolvency or company closure. CVAs are intended to help businesses survive a temporary financial crisis.
The state of the high street in 2020
The Centre for Retail Research has put together figures over the last 13 years of failed UK retail companies and employees affected.
On average, from 2007 to 2020, 40 companies failed per year, affecting 32,533 employees annually. This average includes the financial crises of both 2008 and 2020. Excluding years without a major financial disaster from the average, 38 companies went bust with 24,337 employees affected.
In 2020 (up to the 6th November), 51 companies have gone out of business so far, affecting 82,880 employees.
This means 27.5% more companies have failed in 2020 so far than the 13-year average (40 to 51), and 154.76 % more employees (32,533 to 82,880) have been affected.
The above figures do not include restaurants, cafes and food services, or corporations/department stores headquartered outside of the UK.
Number of CVAs launched in 2019 vs 2020
According to the British Property Federation (BPF), 13 CVAs were put in place in 2019. From Q1 to Q3 of 2020, there were 20.
Q3 of 2020 alone saw 13 CVAs launched, equalling that of the entirety of 2019.
How some retailers are utilising CVAs to address trading issues
This year, more CVAs have been put in place to help companies cope with the financial difficulties caused by the pandemic. However, the shift to online sales also brought an increase in CVA proposals in the years preceding the pandemic.
The pandemic has expedited this shift, meaning companies that were behind in their restructuring, who were still more reliant on physical stores, have felt even more of an impact. Some have turned to CVAs to aid in their restructuring efforts, such as closing stores and changing the conditions of their leases to turnover-based percentages.
This is not what the British Property Federation (BPF) recommends, and have suggested companies such as New Look are using CVAs to permanently alter their leases. It’s not the best new look for the company, with alterations coming at the expense of commercial property landlords and investors.
Melanie Leech, Chief Executive at BPF, said:
“CVAs should not be about permanently ripping up leases – they are supposed to be a temporary measure, as part of a wider rescue plan, to get a business back onto its feet. Property owners absorb significant losses during a CVA to support a business’ future, and in return expect the support measures within a CVA to come to an end upon termination of the CVA.
“New Look is using this CVA to permanently re-write its leases, this proposal is not about a time-limited rescue plan. Property owners are increasingly supporting turnover-based rent models underpinned by collaboration and transparency, but CVAs should not become a mechanism to enforce this.
“We understand the challenges facing the retail, hospitality and leisure businesses on our high streets, which are at the sharp end of the Covid-19 pandemic. CVAs, however, must not unfairly compromise property owners, who need to consider the impact on their investors, including the millions of people whose savings and pensions are invested in commercial property.”
The re-introduction of Crown preference
The re-introduction of Crown preference on the 1 December has reinstated HMRC as a preferential creditor. HMRC will now rank ahead of floating charge holders and unsecured creditors.
This will apply to the Priority Taxes (VAT, PAYE, Income Tax and Employee’s National Insurance Contributions). HMRC will remain an ordinary unsecured creditor in respect of Corporation Tax and Employer’s National Insurance Contributions.
Whilst not exactly big fans of companies who fail to pay their tax (the Amazon-shaped elephant in the room aside), HMRC now requires any outstanding tax liabilities to be paid in full before a CVA can be approved.
It could set a concerning precedent for muddling corporate and individual liability. It also risks unintended consequences to the insolvency process.
In a nutshell, HMRC is moving money from the economy for re-circulation to other businesses and to trade creditors. This means they can pay their own suppliers, and fund public services.
Such a seemingly left-wing policy to fund gasp public services would, not so long ago, have had the Conservatives running for the hills. Was that a pig that just flew past the window?
For expert legal advice concerning all aspects of the CVA process or commercial property, get in touch with the team at Carlsons Solicitors.