Home Business The Landlords Are Pissed About CVAs Again

The Landlords Are Pissed About CVAs Again

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One of the recent amusements has been watching The Times resolutely taking the landlords side in matters economic. There’s been the long running insistence that business rates must be changed because retailers have to pay them. When as we illuminati all know, the incidence is actually upon the landlord. So, the call for online sales taxes, redistribution of rates from property to sales and the like, this is all an argument for a tax cut for landlords.

Then there’s this with the company voluntary arrangement jobbies:

Landlords are urging the government to take immediate action to prevent retailers “abusing” Britain’s insolvency framework by shifting the cost of “years of failings and underinvestment” on to property owners.

The British Property Federation, which counts the nation’s biggest commercial property owners, including British Land, Land Securities and Hammerson, among its members, has written to Lord Callanan, the corporate responsibility minister, calling for tighter rules.

The reason CVAs exist is because there’s a quirk in British leases.

Hmm, no, that’s perhaps too emphatic. The reason they’re used to much is because of that quirk.

The thing being complained of here is that tenants go into a CVA – sorta a bankruptcy lite – which means that they can demand a renegotiation of rents. Forgiveness of past rent due, perhaps, but the real point is to force landlords to the table to renegotiate rents on leases off into the future.

This does pose the obvious question. Why would you flirt with bankruptcy just to get a supplier to negotiate? The answer being that UK leases tend to be long – 21, maybe 25 years – with regular rent reviews. Perhaps every three or five years. But here’s the thing. Most – near all older – such contracts insist that the rent review is upwards only.

If the market rent has fallen, as has been true recently as online eats at the High Street, then you as the tenant on an existing lease are shit out of luck. The landlord just sits there smugly and insists that you must continue to pay above market rent. You can’t close up and walk away from that shop because you’re still on the hook for the rent until the end of the lease. You might be able to offload it to some other retailer but rent doesn’t fall when you do. And if the market price has fallen then who is going to walk in to pay above market?

You are stuffed that is. Hey, sure, you signed the contract and all that so tough. But, then, well.

The CVA offers a way out of this. You can force the landlord to the table. For, in reality if not in entirely and fully legal detail, the CVA breaks the lease. At which point you’ve now got a shop in a place where you can renegotiate the rent to what market is. Sure, the landlord has the option of not agreeing and kicking you out too. Which they don’t because the new lease, with whoever, will be at that now lower market rent anyway.

This is what is being complained about therefore. The landlords are complaining about people using the only manner they have of getting around the upwards only rent review clause.

The federation urged the government to ensure that the voting procedure is fairer to those that the CVA compromises by giving their votes greater weight than the votes of unaffected creditors.

Thus landlords want the entire process to be changed. When, if we’re honest and fair about it, it would be simpler for landlords simply to waive the upwards only clause, wouldn’t it?

The bigger point here though being that the landlords aren’t happy about the boot being on the other foot. Both with business rates and with CVAs. Oh dear, how sad.

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6 COMMENTS

  1. …never mind.

    I’m a landlord, and the only time I’ve increased rent was when the asset being provided changed in value – put in central heating, added a kitchen/utility room. I prefer to – and have – reduce rent for a while over having a vacancy, as it keeps money coming in, keeps the insurance going, and the goodwill is paid back by a continuning tenancy into the future.

  2. For large commercial properties, reducing the rent reduces the book value (and the property manager’s bonus). They would much rather the property was empty with the nominal rent still the same than let it a t a reduced rent.

  3. That’s why commercial leases have been getting shorter for many years. The 21-year institutional lease is largely a thing of the past – it’s so unattractive to a tenant it reduces rental value as evidenced by rent reviews where the notional lease is long.

  4. @jgh – Whilst not a landlord as such, I do have lodgers and agree with you. A good tenant is a blessing when the alternative is a bad tenant and/or vacant periods. One of my lodgers has been in the house 12 years and I haven’t put her rent up in that time.

  5. One reason for the upward only clause is that it improves the security of the bank lending the money to the landlord: it can predict a safe minimum of rental income coming in every quarter for the duration of the mortgage and is therefore confident that the mortgage will be repaid with interest.
    You don’t get comparable clauses in Farmer Giles’ tenancy from the Duke of X.

  6. If you do not want to pay the rent, do not sign a contract saying you are going to do so. And if a tenant does not pay the rent they have agreed there should be no special procedure – another commercial tenant should take over the shop or office. If the rent is too high then the landowner will not be able to get a tenant.

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