As BHS enters administration just 34 days after a CVA, an Estates Gazette Retail Talks debate at Completely Retail London discusses the fallout
The company voluntary arrangement began its life in 1986, designed as a measure to preserve companies while they go through difficult periods. It was, says Mike Jervis, insolvency partner at PwC, designed for small companies, not the large ones that have typically used the system.
“The most important thing with a CVA is that it is viable and that the business plan is fully funded,” says Jervis. “There is no point in doing a CVA if the underlying business isn’t working. And that is the big, big problem with the CVAs that have failed. They weren’t designed just for retail tenants to cut their rents or get rid of their underperforming stores.”
And it is this aspect of CVAs that landlords have the biggest problem with.
“Some of these retailers that go into a CVA talk about onerous liabilities,” says Mark Robinson, founder and property director of shopping centre owner Ellandi. “But it is not an onerous liability, it is a contract that you freely entered into that no longer works for you.”
Jervis adds: “The origin of the CVA was not to disadvantage one party at the expense of the others, but the way in which CVA voting has evolved means that all creditors vote for it but only a small proportion are affected by it. That goes against the spirit of CVAs.”
So what can be done to try to level the playing field in these situations?
For Robinson, it goes back before the introduction of the CVA process, to the passing of the 1954 Landlord & Tenant Act. He says the Act is no longer fit for purpose as tenants have so much choice now.
“They can take short leases, they can do pop-up shops, there’s the internet. And then it would appear, the way that CVAs are being used, that if it doesn’t work for them they can pretty much walk away,” he says.
“At the moment, on expiry of a lease that is protected, if we want to knock a unit together and do a bit of tenant engineering we have to go through a very expensive legal rigmarole that all it does is set up a very confrontational situation with retailers. We would prefer to come together as freely associated parties and enter into contracts.”
For Jervis, there needs to a rethink of the CVA process.
“The key is to understand whether the company proposing a CVA has got a viable business plan. If it has then that is the starting point. Without it, it will fail. The CVA process does not have enough of an independent assessment of that at the moment,” he says.
Jervis adds that the speed at which BHS moved from CVA to administration will likely prompt an inquest or consultation into the rescue measure.
He says any review should look at the independence of opinion on the business plan and its viability, the time that landlords have to react and the fact that a CVA is not designed – but often used – to compromise one set of creditors and “let everyone else carry on their merry way”.
“The CVA construct has got to be a lot more creative and landlord-centric,” says Jervis. “You can’t have a CVA as a mechanism just to bang landlords’ heads together. You need a holistic solution.”
“Whatever else happens, something will change as a result of this,” says Robinson. “I think the day of the CVA may be done in its current format.”
Done, but not disappeared.
“CVAs have got load of failings,” concludes Jervis,” but there has to be some form of insolvency process.”
To listen to the debate in full visit www.estatesgazette.libsyn.com.
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