The below article was first published on the Estates Gazette website on 8th January and can also be found here.
Landmark's David Nicholls and Charles Russell Speechlys LLP's Joseph Green provide an insight into Rent and Forfeiture under the company voluntary arrangement (CVA) regime.
The below article considers whether, in circumstances where a tenant has served notice of its intention to enter into a CVA, can the CVA legitimately make provision for future rent to be reduced and how is the landlord’s right to forfeit affected?
Question
My company owns the freehold of a commercial premises on a busy high street. It has let the premises on a long lease for a term of 25 years to a national retailer that has been experiencing financial difficulties. The lease includes the right for the landlord to forfeit the lease in the event: (i) the tenant takes any step in connection with any voluntary arrangement for the benefit of any creditors; and (ii) the tenant fails to “keep open” the premises during specified hours, seven days a week.
The tenant has recently served notice of its intention to enter into a company voluntary arrangement (CVA). The CVA proposals include reducing rents and closing a number of stores across the country. Can the CVA legitimately make provision for future rent to be reduced and how is the landlord’s right to forfeit affected?
Answer
Future rent and other future liabilities under a lease can in principle be reduced by a tenant’s CVA even if the tenant continues to trade from the premises. However, the court has power to determine whether a CVA unfairly prejudices the interests of a creditor, and this may include deciding that a landlord’s rent has been reduced to below market value.
In better news for landlords, a CVA cannot vary or remove a landlord’s right to forfeit. So, if there has been a breach of the lease that entitles your company to forfeit (such as the entering into of a CVA or the failure to keep the premises open), then the landlord is entitled to forfeit the lease and the tenant may claim relief from forfeiture, subject to conditions.
Explanation
A CVA is a contractual mechanism authorised by the Insolvency Act 1986, whereby a company can restructure its debts and liabilities. A CVA usually involves compromises or variations of contractual rights or other obligations with the consequence that the company can continue to trade for the benefit of its creditors as a whole while paying back an agreed portion of the overall debt over a period of time. A CVA commences when proposals are approved by creditors voting by value. It is therefore not the number of creditors that vote for the CVA but rather how much debt they account for which is material.
In practice, creditors can approve CVA proposals that are based on a substantial reduction of the rent that would otherwise be payable by the company under any lease or leases. Even if the landlord did not vote, or voted against entering the CVA, the decision would be binding on the landlord.
The recent case of
Discovery (Northampton) Ltd v
Debenhams Retail Ltd [2019] EWHC 2441 (Ch); [2019] EGLR 47 concerned a CVA entered into by Debenhams, that had consequences for a large number of premises let to Debenhams across the country. A group of the landlords of those premises applied to the court to challenge the CVA on five grounds, all of which failed bar one.
The court decided that the landlords were creditors because they had claims for “future rent” under the leases, even though the future rent was not a provable debt. This was because “debt” includes a liability for money arising out of an existing legal relationship – and future debt is a liability for money that the company might become subject to in the future because of an existing legal obligation.
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 rents 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.
What might happen when a landlord forfeits against an insolvent tenant was illustrated in another recent case:
SHB Realisations Ltd and another v
Cribbs Mall Nominee (1) Ltd and another [2019] EW Misc 11 (CC). This concerned a commercial unit in a large shopping mall that had been let to BHS. The lease included a keep open covenant requiring the shop to be kept open to the public seven days a week during specified hours. BHS went into administration, then liquidation, and the shop closed causing a breach of the keep open covenant. The landlord then forfeited the lease and the court considered the tenant’s claim for relief.
The court decided to grant relief for a period of three months so the tenant could try to assign the lease. There were a number of factors that influenced the court’s decision, including: if relief were refused, then the tenant (and its lender) would lose an asset of considerable value; and the tenant would also lose the ability to reduce its debts. There was also the consequence for the landlord and other neighbouring tenants to consider. They were suffering from ongoing damage because the shop was closed and the mall was unable to benefit from a new business occupying the premises. The court has power to grant relief on conditions – including time limits. Exercising that power in an attempt to balance the various factors led the court to give the tenant a small window of opportunity to assign the lease.
Joseph Green is a solicitor in the property litigation group at Charles Russell Speechlys LLP and David Nicholls is a barrister at Landmark Chambers
