How are retail CVAs affecting the tenant-landlord relationship?

9th January 2023 | Keith Tully

Financial and operational restructuring has become a familiar sight on our high streets, with many well-known and well-established retailers turning to formal insolvency processes in an attempt to stave off insolvency.

In an ideal world, landlords and tenants would be able to come to a mutually agreeable repayment plan, which allows the landlord to recover the arrears in full while also ensuring tenants can continue to trade profitably. Unfortunately, however, this is simply not often possible.

Retailers and the CVA

Retailers, particularly those with a large network of bricks and mortar high street stores, have long favoured Company Voluntary Arrangements (CVAs) and company administration as tools to restructure both operations and finances.

For retailers with a high street presence, CVAs have become particularly popular over recent years due to the ability to renegotiate onerous lease terms as part of the process. This allows not only existing rent arrears, but also future contractual rental payments to be reduced significantly. Unsurprisingly, this type of arrangement does not represent quite as attractive a proposition to landlords as it does to tenant companies, with many landlords voicing concerns that CVAs are unfairly prejudicial to their interests, making them a prickly issue in the tenant-landlord relationship.

The counter-argument, however, is that even with this reduction in rental payments, landlords are still being offered a better deal than if the CVA was not implemented at all, whereby the alternative to the CVA is likely to be the liquidation or administration of the tenant company.

With a depressed rental market, landlords can easily find themselves in the unenviable position of either watching rent arrears continue to accumulate; forfeiting the lease and facing the prospect of an empty property and all the costs this entails; or alternatively accepting less favourable terms as offered by way of a CVA.

In order for a CVA to be passed, at least 75% (by value) of creditors must give their approval to the proposed terms. At a time where rent arrears are building – in many cases far faster than other liabilities – landlord’s voting powers are likewise increasing, meaning they often hold a huge amount of sway when it comes to an indebted company getting a CVA across the line. In a number of cases, the voting power of landlords now has the ability to halt a CVA in its tracks, leaving tenant companies looking for an alternative.

Introducing the new Restructuring Plan

This is where restructuring plans have been thrust into the spotlight. Restructuring plans are a relatively new addition to the insolvency scene, introduced as the new Part 26A of the Companies Act 2006 during the Covid-19 pandemic. Although restructuring plans serve a similar purpose to a CVA – to facilitate a formal repayment plan with creditors – the way in which this is achieved differs. While a CVA requires 75% of voting creditors (by value) to agree to the proposal, a restructuring plan splits creditors into ‘classes’ with approval requiring a 75% majority from each class of creditor.

Significantly, however, restructuring plans include a “cross-class cram down” provision which allows the court to approve the plan even if this 75% threshold is not reached due to a dissenting group within a particular class. In practice, this means that landlords, as a group, can have their claims ‘crammed down’ by other members of their class even after voting against the proposed plan.

Future tensions on the horizon

While restructuring plans are more expensive and more complex to implement than a CVA, this ability to utilise cross-class cram down may make them more attractive to large retailers looking to force such a plan on dissenting landlords.

With landlords already hostile to CVAs, believing they are treated inequitably by the process, the growing popularity of restructuring plans whereby landlords’ votes can be ‘crammed down’ by other creditors, is likely to further exacerbate tensions between landlords and their tenants who are hovering close to an insolvent position.

While a restructuring plan utilising cross-class cram down has not yet been attempted within the retail industry, with mounting trading and financial pressures coupled with escalating rent arrears, it may only be a matter of time before we see a retailer go down this route.

Keith Tully is a partner at Real Business Rescue, the UK’s leading director advice helpline supporting company directors facing business distress. Keith is a highly experienced company restructuring and liquidation specialist that heads up the Liverpool office of Real Business Rescue.


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