Company Voluntary Arrangements - A Successful Lease Restructuring Tool?

In September 2019, Debenhams Retail Limited entered into a Company Voluntary Arrangement (CVA) with its creditors, with the aim of restructuring its debts. The CVA contained a number of provisions affecting Debenhams' landlords (themselves potentially creditors) in respect of its various department store leases.

At the end of September, a number of landlords (funded by Mike Ashley's Sports Direct) challenged the CVA in the High Court, on the grounds of unfair prejudice to the landlords and material irregularity. The landlords argued that:

• The landlords were not creditors and that their claim for future rental income was not a debt. They raised this argument to try to avoid being bound by the CVA.
  
  
• The provisions in the CVA reducing the rent changed the terms of the leases.
  
  
• The CVA unfairly prejudiced the landlords as it treated the landlords less favourably compared to other unsecured creditors. This was without proper justification.
  
  
• The CVA contained a material irregularity due to the lack of disclosure of potential 'claw-back' claims in the event of administration of the company.
  
  
• The provisions in the CVA restricted the landlord's proprietary rights of forfeiture.
  
  
  

The Court found in favour of Debenhams and held that the CVA was valid. It held that:

• The definition of 'debt' is broad enough to include pecuniary contingent liabilities, such as future rent. This is because the rent would have fallen due and Debenhams would have been obliged to pay it. Therefore, the landlords are creditors and they can be bound by the CVA.
  
  
• The CVA can operate to reduce the rent paid by the tenant and it is not necessarily 'automatically unfair' if there is a reduction. The point of the CVA is to modify obligations.
  
  
• Even though the CVA directly relates to landlords, a specific group of unsecured creditors, treating the landlords differently (than for example suppliers, who can potentially be paid in full for their debts) under the CVA is necessary to secure the continuation of the company's business.
  
  
• Even though the CVA did not disclose the existence of potential 'claw-back' claims in an administration, this was not a material procedural irregularity of the CVA as even if it was contained the creditors would not have looked at the terms of the CVA differently.

The Court however did uphold that a CVA cannot alter the right to forfeiture, as it is a proprietary right (a right relating to an interest of the property). In this case the Court simply deleted the modified terms that altered the right to forfeiture in the CVA, so the agreement was still operational.

What Does This Mean For The Landlord That Is Requested to Enter Into a CVA?

The comments of Norris J in this case on the 'fairness' of the CVA is reflective of the current landlord and tenant struggle in the light of the changing retail landscape.

Norris J stated that 'fairness' should be considered 'in the round'. Unfair prejudice is therefore a question of fact. On these specific facts, a reduction in rent was found not to be unfair, but this may not always be the case.

In this case, all of Debenhams' department stores were being rented at a premium, and the CVA reduced the rents to no less than market rents. The same may not apply where a CVA proposes to reduce rents to below market level.

It is therefore open to challenge as to whether CVAs that attempt to reduce the rents to lower than the market-rent would be 'fair'. A lower than market-rent agreement may also challenge the 'fairness' of the balance of differential treatment to landlords (than other unsecured creditors) that modify their rental income under a CVA.

The Debenhams case is a blow to landlords, but is not the end. Landlords should continue to take an active interest in CVAs proposed by their tenants, and should consider carefully whether their own interests would be unfairly prejudiced by the CVA proposed. This is an increasingly complex area of law, and landlords should seek advice as soon as possible when a CVA is proposed.

If you would like advice regarding these agreements please contact Michelle Bendall in our Property Litigation team on 0117 314 5326, or complete the form below.