No way, CVA: how to downsize without entering into a Company Voluntary Agreement

By Matt Williams

- Last updated on GMT

No way, CVA: how to downsize without entering into a Company Voluntary Agreement

Related tags Casual dining CVA Restaurant

The CVA has been this year's buzzword, but there are other ways to slim down a restaurant estate, says Matt Williams from law firm Fladgate LLP

The recent announcement that Gourmet Burger Kitchen (GBK) has entered into a Company Voluntary Agreement (CVA), and that the owners of Café Rouge have called in restructuring advisers to explore reducing rents across its portfolio, shows that trading conditions in the casual dining market remain difficult.

Commentators are seemingly unconvinced that the measures to reduce rates contained in the budget will give the high street and other locations the shot in the arm that is required. It is therefore worth considering possible alternatives to a CVA that may be available to occupiers looking to reduce their physical presence (or the associated liabilities) on the high street or at leisure and retail schemes.

The typical options available to an occupier wanting to ‘get out’ of a lease are terminating the lease by exercising a tenant’s break clause; negotiating a surrender of the lease to the landlord; selling the lease to another occupier (otherwise known as assignment); or finding a subtenant to take over the premises. A further option is a reduction of rent and/or change in other lease terms by way of a deed of variation or other written agreement (known as a ‘re-gear’).  

As with the preparation for any negotiations, occupiers will first want to find out as much as possible about their landlord’s negotiating position. Ideally, landlords want to have a reliable tenant and certainty of rent and income. However, when the market is depressed, a landlord may itself be experiencing cash flow issues and therefore be happy to consider an immediate cash payment in exchange for releasing a tenant from a lease. Conversely, if it is apparent that the occupier could be in financial difficulty, the landlord may prefer to negotiate a new agreement rather than risk the tenant defaulting on the rent.

Negotiating a lease surrender

If the lease does not contain any continuing tenant break right, the landlord may still be prepared to negotiate its termination. Whether or not that is the case will usually depend on market conditions. In a weak property market, the landlord may be unable to find a new tenant and therefore be unwilling to agree to the premature termination of the lease. Even if the landlord is, in principle, willing to negotiate a surrender of the lease, it may require a payment from the tenant in exchange for the surrender (known as a surrender premium).  

If a tenant is seeking to agree a surrender, it should first remind itself of the lease obligations relating to the state and condition in which the property must be handed back. This could result in the landlord requesting additional costs, in lieu of the tenant complying with the repair and redecoration obligations, to be paid as part of any deal.

A surrender need not be of the whole of the premises. Depending on the nature of the premises, a landlord may be prepared to agree to a surrender of part along with a pro-rata reduction in the rent. This is more likely to be an option at modern purpose built schemes offering more flexible accommodation, rather than units in period high street properties.

If a landlord is prepared to agree to the creation of smaller units, there are likely to be separation and partition costs, which the landlord will look to pass on to the tenant. In reality, landlords will prefer to take a surrender of the existing lease and grant two new leases of the new smaller units.

Selling the lease to another occupier

A lease may allow for its assignment to a new tenant. However, that can be a time consuming and costly process. The occupier will need to find a new tenant and then negotiate with both that new tenant and the landlord (whose consent to an assignment will normally be required).

Again, depending on the terms of the lease, the occupier may still be liable for future payments of rent owed by the new tenant or it may be required to guarantee some or all of the new tenant’s payments and obligations. The new tenant may be asked for a rent deposit or other security and it is worth remembering that an occupier will normally have to assign the lease to a party carrying on the same or a similar use, since the permitted use of the premises may be restricted under the lease. For these reasons, if a lease does not have long to run, it is usually preferable to negotiate its surrender with the landlord rather than try to assign it.

Subletting the premises

A lease may grant a tenant the right to sublet the premises – again, subject to the landlord’s consent. Occupiers should remember that a lease may restrict the amount of rent that can be charged to undertenants (among other conditions); and even if premises are sublet, the original lease will still be in place, and they will retain the primary obligation to the landlord. It is therefore important to investigate the financial standing of any potential subtenant.

There are options available to a struggling tenant which would be worth exploring. They will almost certainly require discussions with the landlord. And while they may not be attractive to the landlord, neither may the prospect of a CVA or a defaulting tenant. If you don’t ask…

Matt Williams is a partner in the real estate department at law firm Fladgate LLP

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