Landlords compromised by CVAs in 93% of cases

The study was commissioned as, in recent years, the commercial property sector has raised significant concerns around their use - particularly in the retail and casual dining sectors. These concerns include how compromises to rental debt, changes to long-term leases or the basis of calculating rents are unfairly affecting them in comparison to other classes of creditors. 

It was commissioned so the Insolvency Service could gather evidence to help form a more complete picture of the issue. As part of this work, the government agency provided a list of 747 companies in the retail, accommodation and food and beverage industries - which has proposed CVAs between 2011 and 2020. 

This was refined to include just those companies that are defined as “large” using the Companies Act 2006 criteria. This brought the number of companies within scope to 82. 

It found the level of compromise - in respect of those that have been compromised - for landlords ranges from 46% to 85%. The average level of compromise for all landlords is 43% - which compares with the average level of compromise given to other key categories of creditor. 

However, the level of compromise of future rent often doesn’t tell the full story. There may be other amendments or additional areas of compromise relating to arrears of rent, service charges and dilapidations that the researchers were unable to assess. 

Collecting this data would be challenging to obtain and was not included in the original scope of the research. This may mean the level of compromise for landlords could be understated. 

Looking at CVAs more broadly, while there may be some individual instances where landlords could argue they have not been equitably treated, based on analysis from the Insolvency Service they are broadly equitably treated when compared to other classes of unsecured creditors. 

The government agency does however acknowledge that the level of compromise for landlords could be understated. There may also be some considerations that could provide greater clarity and improve stakeholders’ understanding of the CVA process. 

One of the issues that was found during the data collection exercise is that CVA proposals are more likely to confuse than enlighten - with these being legalistic, lengthy, repetitive and lacking clarity. This could be improved with standardised summary tables, clauses, schedules and appendices. 

The consultation process could also be improved. As part of this, the Insolvency Service is recommending an update is made to CVA practices in the Institute of Chartered Accountants in England and Wales’ Statements of Insolvency Practice to include consultation with the British Property Federation, on behalf of their members, in instances where landlords are being compromised and when certain criteria are met. 

The results of the consultation should be included in the CVA proposals. This should ensure such consultation is meaningful. 

Overall, the Insolvency Service believes that - while it’s not within its scope to compare all restructuring options available in the UK - the CVA offers a flexible and cost-effective solution that bridges the gap between informal negotiations and formal insolvency procedures such as administration or liquidation. 

It also says it enables companies to implement a legally binding financial restructuring swiftly, thereby providing an increased chance for the business to survive as a going concern - which is arguably a cornerstone of the UK’s rescue culture.