Landlords Lose: Debenhams CVA Challenge
At the end of September 2019 the English High Court (Norris J) issued it’s decision in the Landlord challenge to the Debenhams’ Company Voluntary Arrangement (CVA).
A CVA is an Insolvency Act 1986 procedure, designed to be more flexible than administration or liquidation. It binds all unsecured creditors of a company, if a requisite majority vote for it.
There has been growing dissatisfaction among the UK Landlords about the way CVAs have been used to reduce rents and terminate leases, while short term supplier contracts are paid in full. Challenges have been considered in earlier cases such as NewLook, and brought in House of Fraser (although House of Fraser ultimately ended up in administration and there was therefore no decision on the CVA challenge).
As in previous cases the Debenhams challenge (which was funded by a disaffected shareholder, Sports Direct) was based on “unfair prejudice” (given part of the CVA proposed involved reducing rents for certain categories of stores, leading the Landlords to claim they were treated less favourably than other unsecured creditors) and “material irregularity” (because of potential clawback claims that Debenhams would allegedly been able to exercise if there had been an administration, but which the CVA documentation had not disclosed).
Apart from one specific area related to forfeiture of the leases, the CVA challenge was refused by the Court. Unfair prejudice and material irregularity challenges are always going to be fact dependant. However, of particular significance is that the Court decided that there was no unfairness in this case, with particular reference to the fact that rent reductions did not take the rents in the stores affected, below market value rent. They contrasted Landlords with short term suppliers, whose contracts would typically reflect the market value of an item supplied. That was not always the case with leases that had been entered into many years before. The Court also seemed to consider important that the Landlords retained the ability (albeit on varied terms) to terminate the leases concerned and recover possession of the property.
The material irregularity challenge was also dismissed on its merits.
The decision may well be appealed, but for now provides a very useful discussion of how the courts (Including, we expect, in Scotland) will approach the issue of whether or not there is unfair prejudice or material irregularity in a CVA. So far as the current climate of Landlord challenges are concerned, it will be a brave CVA proposer who proposes rent reductions below market value rents, with the Landlords having to completely compensate other suppliers. We suspect further challenges may still follow.
Contact our commercial property lawyers today
For more advice on Commmercial Leases, fill in our contact form or call us: Edinburgh 0131 5263280 or or Wick 01955 604188