Posted on August 26, 2009 by Siobhan Hayes

CVAs and their effect on landlords

This post was written by Siobhan Hayes and Katherine Campbell.

This week we have seen the headlines about the Focus DIY Corporate Voluntary Arrangement (CVA). It is reported that landlords have accepted the CVA and that will enable Focus to continue a significant part of the business and to retain a large number of jobs. Welcome news in many respects.

CVAs can have a significant impact on a property investment so this posting considers how CVAs work and their impact on leases?

A CVA can be used by a company in financial difficulty to make an arrangement with its creditors to cover the payment of all or part of its debts. It is a powerful tool if used correctly as it can bind individual landlords and vary lease terms even where a landlord did not approve the CVA or did not know of it at the time.

A CVA can only be put in place if it has been approved following a formal process governed by the Insolvency Act 1986. Each CVA has to be approved by a simple majority of the shareholders and by 75% (or more) in value of the company’s  creditors who attend the relevant meeting and vote.  Once approved by the relevant majorities, the CVA creates a binding contract that affects all the creditors referred to in the CVA. Individual landlords can find themselves with no say over how the terms of their lease are affected. The impact on investment value can be significant.

Leases can be varied by a CVA. Rent can be reduced and the lease term can be shorted. Some leases may just be brought to an end. The landlord is bound by the changes.

The 2007 case of Prudential v Powerhouse  created the recipe for CVAs effectively releasing a parent company guarantee where its subsidiary is a tenant and is in difficulty although the CVA in that case failed because it unfairly prejudiced the landlords of stores that were closed when compared to landlords of stores that were to continue trading. As long as there is no unfair prejudice to a group of creditors, lease guarantees can effectively be removed by a CVA leading to falls in investment value.

This year we have seen a case involving the surrender of a lease following the tenant, Cotswold Company’s CVA. The landlord needed to mitigate its loss and to re-let the premises. The deed of surrender specified that the landlord could still claim for any payment due to it under the CVA even though the lease was brought to an end. If Cotswold’s landlord had not clearly reserved the right to make a full claim under the CVA then the deed of surrender would have ended the lease liabilities as normal and removed the landlord’s right to claim for loss of future rent.

All landlords need to consider the terms of any CVA presented to them very carefully to see what claims they may make and to vote accordingly. Some unfortunate CVA wording about future liabilities under any leases may have unfortunate consequences.
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Posted on July 29, 2009 by Siobhan Hayes

Recovering Rent From Sub-Tenants

This post was written by Siobhan Hayes and Katherine Campbell.

Many landlords use an old remedy to recover unpaid rent from sub-tenants where tenants have gone into default. This is set out in Section 6 of the Law of Distress Amendment Act 1908. The remedy pre-dates the rescue culture intended by administration by nearly a century. Given the increasing number of tenant companies in administration, landlords are asking whether the old Section 6 right survives the moratorium that administration gives to the administrator whilst he tries to restructure or sell the company or its business.

This is an area where there is some legal debate at present. We are of the opinion that landlords can use this remedy but it is untested by case law.

What is the effect of Section 6 of the 1908 Act? It creates a right for a landlord to receive rent from a sub-tenant when the tenant is in arrears by service of a notice. Technically, it deems the sub-tenant to be the immediate tenant of the landlord.

What does the moratorium protect? The moratorium prevents steps being taken to enforce security over the property of the company in administration (except with the consent of the administrator or an order of the court). It also prevents the start or continuation of any legal process against the company in administration.

Can Section 6 be used when the company is in administration? The answer to this question hinges on whether Section 6 operates as a method of ‘enforcing security over the company’s property’ or constitutes the initiation of legal process against the company. There does not seem to be any reason for it to fall into the category of being the start of a legal process.

There are some interesting technical legal arguments around the issue of whether this constitutes enforcing security but no case law. Our view is that it probably does not constitute enforcing security over a company’s property and any landlord would be well advised to try the remedy where the tenant is in arrears and the sub-tenant is solvent, whether or not the tenant is in administration.

It will be interesting to see whether in this market there is an administrator who finally challenges a landlord who takes such a step.

Can section 6 be used against unlawful occupiers? Sadly for landlords we think not as Section 6 cannot be used where the underlease was granted in breach of the terms of the headlease. A retrospective consent to a short underlease (rather than a tolerated breach by the grant of a licence to occupy) could be considered coupled with notice of the intention to use Section 6. In the messy world of Administration, where pre packs mean third parties are in possession with the tacit consent of the administrator before you know it, this could help the landlord negotiate for payment of rent as an expense of the administration whilst the building is being occupied by Newco for the purposes of completing the administration.
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