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