It continues to be a very challenging time for our high streets as the move to online shopping, increasing property costs and business rates continue to take their toll.

Following high-street giant, Debenhams’ announcement of a CVA last week, it is unfortunately becoming a more common sign of the high-street’s continuing struggle.

Many household names, including Prezzo, Mothercare, Jamie’s Italian and Carpetright to name but a few, have used a mechanism called a Company Voluntary Arrangement or CVA to re-structure their obligations across their portfolios often to the significant detriment of their landlords.

So, what is a CVA and what can a Landlord do when faced with a tenant going down this route?

From the tenant’s perspective a CVA is a flexible and relatively cheap process allowing the directors to stay in place, though an insolvency practitioner must be involved prior to approval of the proposal and a supervisor afterwards. As long as the approval of 75% of the creditors is obtained at a creditors’ meeting, a CVA will bind all unsecured creditors whether they voted for the proposal or not. Following approval, reduced rents, amended lease covenants and store closures can be imposed on Landlords without their consent. Unsurprisingly CVAs are, as a result, hugely controversial, with many Landlords holding the view that the process is being exploited by tenants to enable them to ditch failing stores and manufacture early exists from unprofitable leases.

Faced with the potential alternative of tenant insolvency however, Landlords often have little choice but to accept the proposals. In the current challenging retail environment, some rent is better than none at all, particularly where the liability for business rates will remain with the tenant and there is little chance of securing a new lease without a lengthy vacant period.

So, what steps should a landlord take when faced with a tenant CVA?

First and foremost, act quickly. Only 14 days’ notice needs to be given of the creditors’ meeting which will vote on the proposals. The agreement should be carefully scrutinised and the Landlord should actively participate in the process. As the proposals can affect existing rent arrears, future rent and dilapidations liabilities, reports should be gathered and evidence should be produced as to the value of any claims. It may also be possible for similarly prejudiced landlords to act in cohort to seek to challenge the proposals. One of the grounds for challenging a CVA is that it represents an unfair prejudice to a particular creditor. In the context of other major retail tenants now seeking CVA clauses in leases which would give them a similar rent reduction where a neighbouring retailer achieves one under a CVA, the time is perhaps ripe for a major Court challenge.

Ultimately, however the bigger consideration will always be whether a CVA is the lesser of two evils. With many more household names said to be considering the CVA option, the controversy surrounding the process will remain a hot topic for some time to come.