In the recent Debenhams’ company voluntary arrangement (“CVA”) case, the High Court rejected an application brought by a group of landlords to challenge the CVA.
Here are the views and perspectives of Donald Peel, Property Litigation Team Leader and Adrian Slater, Head of Insolvency.
Control of Debenhams initially passed to its lenders via a pre-pack administration on 9 April 2019. The Debenhams’ CVA was approved by approaching 95% of its creditors on 9 May 2019, but a challenge was then launched by a group of landlords referred to as CPC (Combined Property Control Group).
The grounds of challenge were:
1. Landlords are not creditors for future rent within the scope of the Insolvency Act 1986 (the “Act”) for the purposes of a CVA and they therefore cannot be compromised under a CVA.
2. A CVA cannot operate to reduce rent payable under leases because it is unfairly prejudicial to do so, or because there is no jurisdiction to do so.
3. The right of forfeiture is a proprietary right that cannot be altered by a CVA.
4. Landlords are treated less favourably than other unsecured creditors, without any proper justification (the “horizontal comparator” test).
5. In failing to adequately disclose the existence of potential “claw-back” claims, the CVA failed to comply with the content required by the Insolvency Rules.
Don says: this case supports the idea that future rent is debt. This is despite the fact that under the lease future rent is not usually considered a debt until it has fallen due to be paid. It also allows rent to be reduced below the contractual rate provided it is not below the market rate. The CVA effectively allows the lease terms to be varied in favour of the tenant without contractual agreement as would be required if the lease were to be otherwise varied. However, the court stopped short of allowing the CVA to alter the landlord’s right of re-entry (other than presumably to stopp forfeiture where the tenant complied with terms of the CVA on the level rent payments).
Adrian says: Debenhams’ CVA reaffirms the position that differential treatment of creditors is allowed but, importantly, any such differential treatment must be fair based upon the particular facts of each case. A key passage of the judgment is the Court noting that many landlords seemed disinclined to forfeit leases on the basis of insolvency, which perhaps indicates the current market rent for vacant department stores is not that attractive. Nevertheless landlords should not view any CVA proposals, with more likely over the coming months (the next one potentially being Pizza Express), as a fait accompli. The best advice for a landlord is that the proposal should be reviewed at an early stage to assess whether there is any unfair prejudice. Legal challenge should be considered alongside negotiations. There was a separate challenge to the Debenhams’ CVA by another group of landlords, but this was withdrawn following negotiations.
The nature of this challenge comes as no surprise. We expect the battle lines to be drawn over changes to the high street; between under pressure retailers and nervous landlords. Property and Insolvency law will be tested to its limits and more litigation is expected to test the boundaries. Also, do not be surprised if the Debenhams case goes to appeal.