Among pages of stories about the death of the high street, it’s the company voluntary arrangements (CVAs) entered into by the big retailers that have drawn the most attention. One of the biggest of these, the Debenhams CVA, has just come before the High Court, with landlords challenging the CVA on five grounds:
Ground 1 – Future rent is not a debt
The first ground of challenge was that future rent is not a debt, as it is not yet owed by the tenant. The upshot of this would be to take landlords’ future rents outside the jurisdiction of the CVA. On the basis that the rent was an upcoming liability, the court found against the landlords on this ground, making their future rents fair game.
Ground 2 – Reducing rents is ‘unfairly prejudicial’ to landlords
The underlying rationale of this challenge was that if the tenant wants the benefit of staying in the property, it should have to pay the rent it agreed with the landlord. The court found against the landlord. If the landlords didn’t like the new rents, they could terminate the leases. In any event, the existing rents were so high, the reductions just brought them in line with market rates (a point that the landlords did not contest).
Ground 3 – The landlord’s right to forfeit cannot be varied by a CVA
The CVA purported to restrict the landlord’s right to forfeit. The court found in the landlord’s favour on this ground. While CVAs could vary contractual rights and liabilities, they could not undermine the landlord’s proprietary right to recover their property.
Ground 4 – Landlords are being treated less favourably than other creditors
The landlords argued that there was no good reason to treat them less favourably than other unsecured creditors like suppliers (whose prices were not reduced by the CVA). The court found against the landlords. There was a fundamental difference between a landlord providing long-term accommodation, and a supplier operating on an order-by-order basis. In any case, the suppliers were being paid market rates, where the landlords were charging rents way above market value. In those circumstances, it was not unfair to bring the landlords’ relative prices in line with the suppliers.
Ground 5 – The CVA did not comply with procedure regarding previous transactions
CVAs are just one of a number of insolvency procedures. When proposing a CVA, the proposer has to alert creditors to the existence of transactions that could be reversed under other insolvency procedures, to give the creditors the ability to weigh up the pros and cons of each procedure before they make a decision. The landlords argued that certain transactions had not been properly notified under this rule. The court found that the notification in the CVA proposal was sufficient for creditors to understand the issue and make further enquiries if they were concerned (and, in any event, a more detailed notification of the issue would not have affected the outcome of the creditors’ vote on the CVA).
There are two key takeaways for landlords and tenants alike:
- There’s a fair chance of CVAs reducing rents to market rates, but probably not below market rates (but query if a CVA could take rents below market if other creditors took a similar financial hit). Landlords and tenants going into a CVA need to come armed with clear valuation advice on the rent so that they can argue this point.
- If, as a landlord, you don’t want to accept the reduced rents, vote against the CVA and don’t accept any rent payments after the CVA has been entered into. Otherwise, you risk waiving the right to forfeit and being stuck with the lower rent.
The decision covers a lot of legal ground. Given its significance, it will almost certainly be appealed, but for now, it helps clarify some of the key legal issues in the CVA debate.