Are Landlords 'Unfairly Prejudiced' By Tenant CVAs?

Retail Company Voluntary Arrangements (CVAs) are becoming an increasingly popular means of minimising liabilities and creating breathing space for tenants during a difficult trading environment on the High Street. Where does this leave landlords?

Most landlords have limited options to protect their asset when faced with a CVA, as demonstrated by the recent judgment in the Debenhams case, Discover (Northampton) Limited and others v Debenhams Retail Limited and others [2019] EWHC 2441 (Ch). The High Court has held that, "[Under a CVA] landlords should receive at least the market value of the property he is providing. He should not subsidise other creditors but nor should they be compelled to overcompensate him."

Here, we summarise the key points for landlords to consider when seeking to argue that a CVA should not stand because of "unfair prejudice".

Company Voluntary Arrangements (CVAs) were introduced as a flexible option in the case of corporate insolvency. A CVA allows a company to restructure its debts and liabilities while it continues trading. Importantly, this is supposed to benefit creditors as a whole, as the alternative may mean creditors realising even less of their debts.

In recent years, CVAs have become more mainstream - this can be a problem for all creditors, but particularly landlords. It is common for landlords to argue that they are poorly treated under an insolvency process that hits the value of their asset and significantly reduces the contractual returns agreed at the start of the lease.

The Debenhams CVA was approved on 9 May 2019 by almost 95% of creditors. Overall, the effect of the CVA for landlords was: proposed store closures, reduction in rent, prohibition on a landlord exercising right of re-entry (forfeiture) triggered by the CVA, and a release of Debenhams from any liability under dilapidations' claims. Landlords had limited rights to terminate the leases.

A legal challenge by a group of landlords ("the Landlords"), opposed the CVA on five grounds. One ground was that the landlords were "unfairly prejudiced" compared to the other creditors. Whilst this challenge failed to strike down the CVA, the court gave helpful guidance on what it meant for a landlord to be "unfairly prejudiced".

Legal Challenge?

What can a landlord do when faced with a CVA that dramatically reduces rental income? A challenge may be possible under section 6(1) of the Insolvency Act 1986, if:

The CVA unfairly prejudices the interests of a...