In his runner-up entry in the Property Litigation Association’s Alan Langleben Memorial Blog Competition 2021, Adam Osieke tackles the following question: The Law Commission is reviewing property legislation: what do you think they should change first and why?
Stopping the CVA wrecking ball
“Ill-drafted, complicated and confused.”
Lord Browne-Wilkinson did not mince his words when it came to giving an opinion on the Landlord and Tenant Act 1987. Few people would disagree with that assessment. Many would also place the LTA 1987 at the top of their list of property legislation in need of reform.
Surprisingly though, another statute is now challenging the LTA 1987 for pole position in the race for legislative reform: the Insolvency Act 1986.
This looks like an embarrassing mistake, I know. This is a property law blog and the IA 1986 is not, by any measure, a piece of property legislation. Which is precisely the point. No self-respecting property statute would ever allow itself to be used in the manner of a wrecking ball, smashing its way through hundreds of individually negotiated commercial contracts and without any regard for the intentions of the parties.
By that metaphor I am, of course, referring to the effect of company voluntary arrangements on commercial leases (Part 1 of the IA 1986). Typically, a CVA proposal from a commercial tenant draws a distinction between landlords and other creditors. The bulk of the cost savings needed to prevent the company from entering into insolvency are found through rent reductions. In some cases, the proposal might even substitute the contractual rent completely, in favour of a capped turnover rent.
And in most cases, the CVA proposal goes further than compromising the tenant’s financial obligations. New break options and a waiver of the dilapidations liability are not uncommon features.
This skews the balance of profit and risk within the commercial relationship between landlord and tenant. It also flies in the face of a core principle of contract law: the certainty of agreed terms. Both parties stand to derive income from the property asset. The landlord takes a fixed yield but avoids the risk of market uncertainty. The tenant enjoys the prospect of unlimited income but must accept the risk of loss, too. But a well-drafted CVA proposal can quickly change all that. Effectively, the landlord is being asked to share the tenant’s losses, but not its profits.
It should be said that the IA 1986 does already gives creditors the right to challenge a CVA proposal in court on the basis of unfair prejudice. But the reality is that most landlords simply do not have the time or the funds to become embroiled in litigation.
One way to redress the imbalance would be to require tenants to obtain prior permission from the court if their CVA proposal has the clear potential to prejudice one class of creditors over another. Defining and implementing a threshold test would not be easy, of course. Even so, this area of law is in need of urgent reform. The increased use of CVAs in this way has the potential to undermine the confidence that is so badly needed in the commercial retail market as we begin to emerge from the Covid-19 pandemic.
Adam Osieke is a managing associate at Cripps Pemberton Greenish
The winning entry by Lucie Barnes, senior associate at Brodies LLP, which tackles the Telecoms Code, can be read online at www.egi.co.uk/legal/the-telecoms-code-three-years-on
