If your business involves letting property to retail tenants you will know that many in that sector are struggling in a very tough market. In an effort to reduce overheads an increasing number of retailers have sought to propose a company voluntary arrangement under which landlords are asked to accept a reduced rent or risk the retailer going bust.
Household name retailers used to be considered safe bets as tenants, but now many of them are failing. A company voluntary arrangement can turn a struggling company around but in practice it can often be the first step on a path to insolvency. If a tenant proposes such an arrangement it is likely that landlords will be asked to bear the brunt of any cost-cutting proposals and therefore careful consideration needs to be given to whether the proposal should be supported. Legal advice is essential to ensure you make an informed decision and could also, if taken early enough, help to avoid such a scenario arising.
What is a company voluntary arrangement?
A company voluntary arrangement is a legally binding process under which a company can reduce its debts and future liabilities. The company will put together a proposal for how it intends to do this, which will go to the company’s creditors for approval. The proposed arrangement cannot reduce formal debts like mortgages and will affect only unsecured debts like rent arrears and money due to suppliers. If those owed at least 75 per cent of these debts vote to approve the arrangement it will be legally binding on anyone owed an unsecured debt by the company, even if they voted against it.
Impact on landlords
Landlords are hit hard by company voluntary arrangements because rent usually accounts for a large proportion of the tenant’s unsecured debts and future liabilities. Arrangements proposed by retailers will usually include proposals to reduce the rent on some or all of the tenant’s stores and to close some stores completely. Once an arrangement is approved the landlord has no right to take any action to recover the rent that would otherwise have been owed and this applies to future rent as well as any debts that have already built up. If the arrangement is proposed by a small company this restriction applies as soon as the proposal is received by the court, not just after it has been approved.
What can landlords do?
When faced with a proposed company voluntary arrangement, landlords have some difficult decisions to make and good legal advice is essential. You may get back more of the money owed to you under the arrangement than you would if the tenant went into immediate insolvency, but you need to consider carefully whether this would be likely on the facts currently known.
You may be able to defeat a proposal if you can show that it treats you unfairly when compared to others to whom the company also owes money. A good example of this is the company voluntary arrangement proposed some years ago by the Powerhouse group of companies. The proposal would have allowed the strongest company in the group, which had given guarantees in relation to individual leases, to be released. Acting together, a group of landlords argued successfully that they would be unfairly prejudiced by this and as a result the proposal failed.
Alternatives to a company voluntary arrangement
If you think your tenant may be in financial trouble take legal advice straight away. You may be able to agree a more acceptable package of measures with the tenant to help to alleviate their financial difficulties. This may include agreeing to them moving to monthly rent payments or even agreeing to release them from their lease if you think you can find another tenant quickly or if you want to refurbish or redevelop the property. If a company voluntary arrangement is approved you will no longer have a say. Getting advice in time could help you stay in control of a difficult situation and ensure you keep the rent coming in.
For advice on all commercial property or landlord and tenant matters, please contact our commercial property team on 01225 755621.