There has been a lot of attention on the use of CVAs in recent months. Many big-name brands are using them to divest themselves of lease obligations which have become onerous in the current market, including House of Fraser, Carpetright, Toys “R” Us and New Look.
CVAs have been used by companies in financial difficulties for some time and are a natural reflection of the well-documented ongoing challenges faced by retailers. They are generally recognised as a useful tool which can be utilised potentially to the benefit of both the tenant and landlord where a company is in genuine financial distress.
More recently, however, there has been a flurry of high-profile CVAs which have cast doubt upon their use. There have been concerns surrounding the hiving off of funds, suspiciously good financial health and being used as a way to get rid of underperforming stores. This is damaging to the landlord-tenant relationship as well as the integrity of the UK investment market and economy.
The balance of power is now shifting in tenants’ favour, with landlords worried that vacant properties cannot be easily re-let in the current climate. One tactic to persuade a landlord to vote for a CVA is for the tenant to threaten to abandon the store if not approved. This would put the landlord in a worse position, with only a claim for damages as an unsecured creditor and no guaranteed ongoing rent payments.