Landlords are losing out as more and more retailers exploit company voluntary arrangements in insolvency situations. Daniel Long sheds some light on this thorny issue.
As high street retailers continue to face tough trading conditions, company voluntary agreements (CVAs) are an increasingly popular way to reduce liabilities and gain financial wriggle room.
CVAs were introduced as a flexible insolvency option that would enable businesses to restructure their debts and liabilities, while continuing to trade. The commercial logic was that CVAs would benefit creditors in general because other forms of insolvency – such as administration or liquidation – would see them receiving even less of what they were owed.
In addition, some commercial landlords will prefer to have a unit occupied, even if this means taking a hit on the rental income.
However, other landlords are pushing back against the CVA trend, which they say unfairly impacts them compared to other groups of creditors. Landlords argue they often get the short end of the stick when it comes to CVAs, so it’s no surprise that the terms of CVA proposals keep coming under scrutiny.
The issue was highlighted by a High Court ruling in the recent case of a group of landlords who challenged a CVA proposed by national retail chain Debenhams.
The implications of the High Court ruling
Although the challenge was largely unsuccessful, there were a number of positives from a landlord’s perspective – as well as lessons to be learned for the future.
The landlords argued that the terms of the Debenhams CVA were unfairly prejudicial against them, claiming that future rent did not represent a ‘debt’ and should not, therefore, be compromised by the terms of the CVA. They also challenged the extent to which a CVA could alter a landlord’s contractual right of forfeiture.
The High Court ruled that future rent liabilities were, indeed, a debt for the purposes of the insolvency legislation and that the terms of the CVA were not unfairly prejudicial because no landlord was being forced to accept a rent lower than the market rate.
Important areas in which landlords succeeded
Nonetheless, the landlords successfully argued that a CVA cannot vary contractual proprietary rights under the lease – in other words, modify or remove the right of forfeiture. This enables a landlord to end the lease early and re-enter the property if the tenant has breached the contract, for example as a result of not paying rent on time, or in full.
In its original form, the Debenhams CVA would have impacted on rights to forfeit and so, in this respect, the ruling was a notable achievement. Previously there had been some room for debate over the extent to which a CVA could alter certain lease rights and this case provides welcome clarity.
On a practical level, this success may be less significant given the ability to vary the lease terms that would trigger the right to forfeit.
Going forward, landlords will have better prospects of challenging the terms of a CVA on the ground of unfair prejudice where the CVA proposal seeks to reduce rent below market rate or tries to modify or remove the right to forfeiture.
Even so, it should be kept in mind that even a successful challenge may not defeat the CVA if the court simply chooses to alter its terms.
The Debenhams decision may still be appealed, so landlords are advised to watch this space.
Key lessons to be learned about challenging a CVA
There are several key learning points to be taken from this decision.
Firstly, the Debenhams challenge hasn’t significantly altered the way struggling tenants and the courts will approach CVAs. It seems we can still expect to see further CVAs being proposed in the retail sector.
Moreover, each time there is a significant judgment like this, the specialist insolvency practitioners who structure CVA proposals will learn from the ruling and devise terms that are increasingly hard to challenge.
However, landlords should continue to closely examine the terms of any proposed CVA. These matters are very fact-specific and an unsuccessful challenge to one CVA does not mean a challenge to another CVA will automatically fail.
Finally, while there are different ways the terms of a CVA proposal could potentially be unfairly prejudicial, landlords should consider whether the terms of a CVA attempt to reduce rent below the market rate or modify the landlord’s right of forfeiture.
For further advice on CVAs, or any other leasehold dispute resolution matter, call Daniel Long on 0161 761 4611 or email him at firstname.lastname@example.org