Retail Company Voluntary Arrangements (CVA’s) have experienced a rise in popularity against the backdrop of a struggling high street. As a means of minimising tenant liabilities and creating a breathing space in a challenging trading environment, they can be a useful compromise for both parties.
However not all are in agreement as to the benefits of the CVA.
CVA’s were introduced as a flexible option in cases of companies facing insolvency, and allow a company to restructure its debts and liabilities while it continues trading. The key point at issue is that CVA’s should benefit creditors as a whole, rather than prioritising one creditor over another.
This can be a particular problem for Landlords of which a group in the recent case of Discover (Northampton) Limited and others v Debenhams Retail Limited and others [2019] EWHC 2441 (Ch) expressed they felt poorly treated under a CVA with Debenhams.
In this particular instance the CVA was approved on 9 May 2019 by almost 95% of creditors, but a small selection of Landlords considered the terms of the CVA to unfairly prejudice them. This was due to provisions such as a reduction in rent, prohibition on a landlord to exercise a right of re-entry (forfeiture) and a release of Debenhams from liability under dilapidations claims.
Some Landlords therefore feel the result of these provisions which could hit the value of their asset, and significantly reduce the contractual return for the premises agreed at the start of the lease, to be unfairly prejudicial to them.
In the Debenhams case the CVA was opposed on five grounds, and although the ‘unfairly prejudiced’ ground failed to strike down the CVA in this instance, the court gave guidance on what it actually means for a Landlord to be unfairly prejudiced.
Is the CVA ‘unfairly prejudicial’?
Two tests need to be considered to prove a CVA is unfairly prejudicial.
- The vertical comparator test
A test that compares the projected outcome of the CVA with the projected outcome of a realistically available alternative process (e.g. liquidation). This test serves as setting the ‘lower boundary’ below which a CVA cannot go.
- The horizontal comparator test
A test that asks if the treatment of the different creditor groups is fair. As the purpose of a CVA is to benefit creditors as a whole, a reduction of rent to a Landlord will not automatically make the CVA unfair. However, this treatment must be justified on the particular facts of each case.
From the above we can see a balancing act taking place of Landlord and other creditor’s interests. However, an important qualification to note from the Debenhams case if you are thinking of entering a CVA as a Landlord is that you should receive at least the market value of the property you are providing, and should not have to subsidise other creditors or be overcompensated by them.
It therefore appears on the basis of the Debenhams case that whether a Landlord considers a reduction of rent to market value as being unfairly prejudicial to them, is nothing less than a moot point and nothing more.
If you would like advice in this area you can contact our Property Litigation team by calling 0161 941 4000 or by emailing lawyers@myerson.co.uk