Discovery (Northampton) Ltd v Debenhams Retail Ltd 2019: Company Voluntary Agreements
Posted on 26th February 2020
Imagine then you own the freehold of a commercial property in the centre of Preston. You have let the property for twenty five years to a national retailer; a retailer that you have now heard on the news is struggling financially. The lease states that you, the landlord, can forfeit the lease if (1) the tenant takes any step in connection with any voluntary arrangements for the benefit of any creditors, and (2) the tenant fails to “keep open” the premises during specified hours. You tenant then serves notice that they are going to enter into a CVA. The CVA includes proposals to reduce rent and close a number of stores. So would the CVA mean that future rent can legitimately be reduced and will you, the landlord, still have a right to forfeit the Lease?
In theory rent and liabilities under a lease can be reduced by a tenant’s CVA, even if the tenant continues to run their business from your premises. That said the Courts do have the power to determine whether a CVA unfairly prejudices the interests of the creditor, this could include the Court making a decision that a Landlord’s rent has been reduced to below market value.
The unfortunate fact here though is that the Court may not make that decision and that decision could only be made once you have spent the money getting the matter to Court. The better news here is that a CVA cannot vary or remove a Landlords right to forfeit the lease. If for example the CVA said that the company had to close on a Sunday to reduce wages, but your lease says that they had to remain open seven days a week then the Landlord is entitled to forfeit the Lease. Beware though as tenant, depending on the lease, may be able to claim relief from forfeiture.
Why does the CVA allow this to happen? A CVA is a contractual mechanism authorised by the Insolvency Act 1986 that allows a company to restructure its debts and liabilities. The CVA involves varying contractual rights and obligations that the company has entered into in the hope that it can continue to trade whilst paying back an agreed proportion of overall debt over a period of time. In order to obtain a CVA the creditors would have to vote by value, it would not be the number of the creditors voting for a CVA rather it would be the total of debt they account for. For example, 5 people may vote against the CVA but the total of those five people’s debt may be £100,000.00 whereas one person may vote for the CVA and because their total of debt is £500,000.00 the CVA would be put in place. In theory then, the landlord could vote against the CVA, one of the CVA proposals could be that there should be a substantial reduction of rent and that decision would still be binding on the Landlord.
The recent case of Discovery (Northampton) Ltd v Debenhams Retail Ltd 2019 involved a CVA which Debenhams had entered into. A group of landlords affect by the CVA all grouped together to challenge the CVA on five grounds. Four of the five grounds failed. There are two ways in which a CVA can be challenged as unfairly prejudicial. One is to consider the overall outcome of the CVA in comparison with another insolvency process. Another is to compare the treatment of creditors between themselves. The landlords challenged the reduction in the rent’s payable under the leases on the second basis but were unsuccessful, in particular because the CVA provided for the landlords to bring the lease to an end if the landlords felt the reduced rent was unfair.
However, the landlords did succeed in persuading the court that the CVA had wrongly varied their right of forfeiture. The court ruled that a CVA could not be allowed to prevent landlords from forfeiting their leases because the right to forfeit was a proprietary right belonging to the landlords.
For help and advice before entering into a Lease speak to our Property Solicitors via firstname.lastname@example.org or call 01995602129.
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