With the ongoing challenges facing the retail sector, Company Voluntary Arrangements (CVAs) pose a real threat to landlords, where dilapidations liabilities are not recognised.
A CVA is a formal process, supervised by a qualified insolvency practitioner. The aim is to allow a company to trade its way out of trouble (see our key facts on CVAs below).
In terms of commercial leases, those at greatest risk to landlords are:
What this means for you as a landlord
Once the CVA process has started, it is already too late for landlords to demonstrate the tenant’s dilapidations liabilities, which get valued at only £1. This is due to recent case law determining that as dilapidations liabilities are rarely quantified prior to lease end, the dilapidations value is unascertained, and therefore is given the £1 value.
This means it is the loss making (Group C) stores which provide the greatest exposure for landlords with respect to dilapidations once the CVA process has started, with a tenant’s dilapidations liability essentially being wiped out.
Typically retail units have extensive fit-outs, which often need stripping out at lease end to allow a quick re-letting of the property. In properties where a tenant has a full repairing obligation both internally and externally, repairing and decorating works are also often required. This creates significant (dilapidations) cost in most instances.
How can landlords provide evidence of their future losses to avoid the £1 dilapidations valuation?
How can we help you demonstrate a tenant’s dilapidations liability?
But, what happens if a CVA fails?
Recent studies have found that 50% of big brand tenants who have entered into the CVA process have gone on to enter into administration, with Mothercare being a recent example.
Once a tenant goes into administration, the chance of dilapidations monies being recoverable becomes very unlikely, regardless of whether or not a landlord has provided evidence of the tenant’s dilapidations liabilities pre-CVA initiation.
By keeping a close eye on your tenant’s profitability, you will stand a better chance of foreseeing a CVA application and taking the appropriate actions (as detailed above), however, it is clearly more difficult to forecast is when a tenant is set to enter into administration, where a CVA hasn’t resulted in a tenant trading its way out of trouble.
Balancing the risks
This means that landlords undertaking a dilapidations schedule, will incur a cost in fees, when a tenant may go on to enter administration (where fees may no longer be recoverable).
Landlords will have to assess this risk of expenditure on fees versus the potential of having no grounds of recovery for dilapidations, should a tenant enter into the CVA process, but not end up going into administration. On buildings where a tenant is the sole occupier and has a full repairing and decorating obligation, the dilapidations liability could be considerable.
If you want more information regarding the implications of CVAs and your options as a landlord, call or email Adam Farrer.