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When a company voluntary arrangement (CVA) is on the menu…

  • United Kingdom
  • Real estate

08-03-2018

Eversheds Sutherland property column: March 2018.

Originally published by Practical Law

The last few weeks have seen a flurry of restaurant chain troubles, with the likes of Jamie's Italian, Prezzo, and burger chain Byron proposing company voluntary arrangements (CVAs) with the primary purpose of reducing the leasehold estate. The industry blames the new living wage, the apprenticeship levy, rises in rates and the Brexitinduced fall in the pound increasing the price of foreign bought ingredients. The analysts point to over-supply in the sector, excessive expansion fuelled by enthusiastic private equity cash and a drop in consumer spending. It seems that post the Christmas boost, when the VAT man came calling for his quarterly VAT return it was the final push towards CVAs. And the next quarterly rent payment is soon due, and the snow won't have helped…

So what can a landlord do when faced with a tenant's CVA? Well firstly turn up, join in and vote! Until the proposal is approved there is still a chance to influence the terms of the CVA, whereas afterwards landlords will be bound by the terms of the CVA regardless. The insolvency practitioner supervising the CVA is under an obligation to notify all known creditors of the plans for the CVA, so it pays to make sure that your address for service is up to date and monitored.

The CVA doesn't automatically remove a landlord's right to forfeit a lease, but that might be included in the arrangement, as might restrictions on recovering rent through the commercial rent arrears recovery process court proceedings or by way of statutory demand. It might even be that a landlord is prohibited under the CVA from drawing down against a rent deposit. For smaller companies entering into a CVA, there's a statutory moratorium which has the same effect.

A CVA can cover payments due in the future from the tenant, so a landlord might be faced with an arrangement which reduces not only its right to arrears but also to future rents. Careful drafting of guarantee provisions might save the landlord's rights against former tenants (under original tenant liability for old leases or AGAs for new) and present guarantors. Following Prudential Assurance Co Ltd and others v PRG Powerhouse Limited and others [2007] EWHC 1002 Ch (in which guarantors used their clout as the largest creditors of the tenant to vote through a CVA which released them from lease guarantees), lease guarantee provisions usually include an indemnity from the guarantor to the landlord for any losses the landlord might suffer from such a scheme. Review those leases, find that indemnity and remind the guarantors of it.

Restaurant leases have their own additional complications: for example, who holds the premises licence? A licence held by a company entering a CVA will lapse on approval of the arrangement. A continuing business will need to re–activate the licence immediately to be able to continue to sell alcohol. Failure to re-activate the licence within 28 days could see it lapse permanently. If a premises licence is lost, it might not be so simple, in a cumulative impact policy designated area, to get another licence when you find another restaurant tenant. So be careful not to let a licence lapse. Hopefully, if it's the restaurant in your premises that is closing, the lease provides for the tenant to transfer the premises licence to the landlord or its nominee.

Restaurant kitchens are often full of expensive kit that your capital contribution at the start of the lease may have paid for. Just occasionally we see landlords who have taken a charge over that kit. This could give an option for recourse, even if on the occasions it is seen it is usually a time limited charge perhaps for just the first three years of the lease term. More often landlords receive notice from third party providers telling them that the kit is charged in favour of the third party, or is the subject of a hire-purchase agreement: the message being "hands off!"

If you're unlucky, and the premises you let to the tenant houses one of the restaurants that will be closing under the terms of the CVA, be very sure not to accept the premises back before you absolutely have to. Although such CVAs now usually set aside a fund to pay the rates on closed properties for at least a while, once a landlord has responsibility for a property again there will be an insurance rent and service charge void, and perhaps a knock-on effect on the rest of any scheme. Nearby retail units paying turnover rents may suffer reduced footfall if restaurants around them close, so there may be a collateral wider rent loss to the landlord. Hopefully the lease expressly reserves the right for the landlord to film the windows, erect hoarding or similar, without triggering a surrender of the premises. Anything to avoid the rent-suppressing effect of a unit gone dark.

In times of potential trouble it pays to enforce that lease covenant that requires the tenant to provide turnover information (even if not a turnover rent lease) so as to be forewarned of financial difficulties. It is prudent to secure several layers of security, perhaps both a guarantor and a rent deposit. The drafting of a robust agreement for lease with the next restaurant trend tenant as they come and go should perhaps include staged payment of capital contributions and reserve the right to set off sums owed by the tenant against their payment (as they struggle in their early days of trading perhaps). Rather than a full rent free period, maybe a longer period at half rent so there is some rental income whilst the business establishes itself, just in case it fails.

Unfortunately there is no doubt that we won't have seen the last of the CVAs amongst the restaurants, not just for the reasons that the industry is blaming now. As food and consumer fashions change with ever-increasing speed, restaurants and bars will most likely come and go at the same pace. We should get used to the CVA on the menu.

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