Opinion

To CVA or not to CVA?

By Victoria Oates

- Last updated on GMT

What is a restaurant CVA and are they useful

Related tags: shelley sandzer, Victoria Oates, Casual dining, Property

Shelley Sandzer partner Victoria Oates explores Company Voluntary Agreement - CVAs for short - in the time of the Coronavirus crisis.

Even before the devastation wrought by the Coronavirus, it is fair to say the restaurant and leisure sector had already experienced more than its share of problems over the past few years.

Businesses have had to face significant rental and rates rises, increases in the national living wage, and rising commodity prices due to the pound being devalued as we continue the wrangle over Brexit.

As all of these occurred at the same time, returns in the sector were squeezed, leading to what has been referred to widely as the perfect storm.  In many instances, the situation created unsustainable business models with failure being inevitable without drastic action being taken. Enter stage left, the Company Voluntary Agreement, more commonly know as a CVA.

A CVA allows operators to secure rent reductions and to immediately close and exit unprofitable sites. We are all aware of the highly publicised failure of Jamie’s Italian, one of the very early ‘mid-market’ eateries to go down this route, quickly joined by other large casual dining casualties. 

In the early days, there was an awful lot of stigma attached to CVAs, with the critics (mainly landlords left with empty properties) having to suffer the loss for what they considered to be operators’ poor business choices.

Landlords cited the problem being operators opening too many restaurants too quickly and in the wrong places, driven in many instances by private equity. Wherever your sympathy lay, there were problems on both sides of the landlord/tenant divide.

As a professional advisor, one of the first things I look at is the lease, it effectively being the ‘contract’ between the parties. The CVA process is completely at odds with this as it rips up the existing agreement between the parties and presses a ‘reset’ button. 

Coronavirus is not of the landlords’ or the tenants’ making and arguably therefore the effects of this should be shared. When Boris Johnson told the nation’s hospitality industry to close, it left operators with little or no income whatsoever.

Whilst furlough and business rates relief, and now the Eat Out To Help Out scheme, are all helping the beleaguered sector survive – it still does nothing to address the debt mountain of unpaid rent from the previous months that has built-up.

Some landlords moved quickly to assist their tenants by writing off a period of rent, slashing the existing rent roll and/or turning to a more equitable turnover model. Others have not behaved so kindly, or indeed been able to, threatening tenants with winding-up orders to try to get them to pay their rent. 

We currently have the British Property Federation, British Retail Consortium, UKHospitality, ukactive and Revo lobbying the government to do more to help the sector following the criticism levelled at the Code of Practice (on commercial leases) published by the government earlier in the crisis.

Given this is the third attempt by many of the signatories to get the government to listen, I am not sure anyone in the industry is holding their breath in positive expectation. In the meantime, the debt is not going away. 

Early critics of the CVA called it out as a sticking plaster, as more often it failed to address the root cause of a particular businesses failing, leading to it limping on for a few more years before the plug was finally pulled. Jamie’s Italian is a prime example.

The Coronavirus has to a large extent put paid to the stigma of CVA with perfectly viable and profitable operators now viewing a CVA simply as a business tool to reduce portfolio size and liabilities, and thus give their businesses the best chance to move forwards.

But such an approach places operators and landlords on opposing sides once again, when clearly they need to be collaborating, cooperating and compromising with one another to achieve mutual success.

Is it not time, therefore, for the industry and its advisors to rethink the purpose and use of the CVA? It may have worked once, and might still be the answer for some, but its widespread use has not only devalued it as an option, but is at risk of pushing the industry further apart just at the time it needs to come together.

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