We have continued to see a number of high profile company voluntary arrangements (CVAs) this year. What top tips can you give to landlords who may be faced with a CVA?
Yes, there have been lots of CVAs in 2020, haven’t there? Whereas CVAs were previously used to reduce rents and close underperforming stores, post-COVID-19 we have seen some new trends: large amounts of arrears being written off, conversion to turnover rents and new pandemic rent suspension clauses being the obvious ones.
My first tip would be to engage and do it early. We are seeing more landlords treated as “Category A”, which means they are largely unaffected by the CVA, because they have reached a consensual deal with the company outside of the process. Such deals, whilst painful, are always preferable to having CVA terms imposed on you.
Landlords should consult the BPF’s Top 10 “red flag” CVA clauses. These are the most commonly used terms in CVAs that appear onerous but arguably unnecessary in order to rescue the company’s business. If any of them feature in a CVA then push back. There is scope to modify CVAs by negotiation between publication and voting at the creditors meeting. It happens more often than you might think.
Finally, if you think that you have been unfairly prejudiced by a CVA then you have 28 days from approval to challenge it at court. This is quite a short time-frame and can’t be extended so you need to act quickly.
You are Vice-Chair of the Property Litigation Association (PLA), having just completed a 3 year term as Chair of the PLA’s Law Reform Committee. Can you share with us any noteworthy law reforms that may be on the horizon?
The Government has set quite a hare running with Communities Secretary Robert Jenrick’s announcing on 9 December that there will be a review of “outdated” commercial landlord and tenant legislation, to address concerns that the current framework does not reflect current economic conditions. Many are wondering what that means. Further curbs on commercial landlords enforcing tenant covenants would be controversial, as would be revisiting upwards/downwards rent reviews. Possibly, the Government would like to facilitate greater use of turnover rents.
At the same time, the Law Commission is beginning the process of identifying potential law reform projects for public consultation in 2021. They have previously said that reform of commercial leasehold law had “extensive and cross-industry support” and “could be undertaken in the future”. Commercial landlord and tenant reform certainly seems to be in the cross-hares. An overhaul of the Landlord and Tenant Act 1954, the Landlord and Tenant (Covenants) Act 1995 and the right of first refusal in the Landlord and Tenant Act 1987 would be obvious targets.
Finally, the Government will be regulating pre-pack administrations in 2021, preventing administrators from disposing of property to connected parties within the first eight weeks without the approval of the creditors or an independent written opinion on whether the case has been made for the disposal. It will be interesting to see whether that addresses remaining concerns about pre-packs.
You normally prepare a list of Top 10 cases for the year. Is there a clear number 1 this year?
I am biased, but will say EMI Group Limited v The Prudential Assurance Company Limited, a case on which we acted successfully for M&G Real Estate.
Ostensibly, Prudential had a guarantee from EMI as guarantor of the former HMV store on Oxford Street. The lease had been assigned to retailer Forever 21, which fell into administration, and HMV dissolved but the guarantee remained in place. Needless to say, EMI disputed its validity. The 1995 Act has come to the rescue of many former tenants and guarantors in similar situations in the past, as their liabilities must be released on an assignment of the lease save in very limited circumstances and subject to strict antiavoidance provisions.
In the end, the court found for Prudential: the terms of the guarantee were clear and EMI could not object to a deal it has signed up to with its eyes open. I think the case marks the fact that the tide has now turned in favour of landlords and the courts may have reached their limits in finding against them based on the very many technical problems that arise out of the Act.
Which of Brexit and the COVID-19 pandemic would you say impacted your work most?
Without question, the COVID-19 pandemic. Never before in the history of property law have so many lawyers given so much thought to whether, and in what circumstances, leases can be frustrated! The pandemic has also led to renewed focus on turnover rents and rent suspension clauses. At the beginning of the pandemic, the industry had to upskill very quickly about landlords’ duties under various new Government regulations and work out how to reconcile those with lease covenants. As matters progressed, the huge disruption to trade in the retail and hospitality sectors in particular has led to a wave of insolvencies.
But Brexit has been a factor. I don’t think I have read one retailer CVA that did not blame Brexit for its financial troubles in one way or another. Part of the problem is that the pandemic has come at a time when many bricks and mortar retailers were already in a parlous state, including because of the value of the pound and low consumer confidence. How much of a factor this will be going forward depends to some extent on the trade deal the United Kingdom will have with the EU, if any!
Did you pick up any new hobbies or habits during lockdown that you plan to continue in 2021?
In no particular order: playing the guitar more often, listening to a lot more music, seeing a lot more of my wife and daughter, and making my own sandwiches rather than buying them at Pret!
What challenges do you think clients will be faced with in 2021?
The lifting of restrictions on landlords taking enforcement action against tenants could be both a blessing and a curse. The risk is that a wave of forfeitures, CRAR and statutory demands after the end of March 2021 could lead to an even greater spike in insolvencies, including more CVAs and pre-pack
Finally, what’s your new year’s resolution?
I’ve been too busy to make any!