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Court rejected landlords’ challenge to Debenhams’ CVA in what will be seen as a victory for retailers and a validation of ‘landlord only’ CVAs.
- Landlords’ challenge to Debenhams CVA rejected on four out of five grounds
- The CVA will continue subject to deletion of provisions restricting landlords’ forfeiture rights
- Debenhams Retail Limited  EWHC 2441 (Ch)
A Company Voluntary Arrangement (CVA) is a legally binding arrangement entered into by a company in financial difficulty with its unsecured creditors under which the creditors’ debts can be discounted and which can vary existing contractual terms between the company and its creditors.
The use of ‘landlord only’ CVAs has become extremely popular in recent years as a method of reducing rental costs which retailers see as overly onerous. There has been a backlash against such CVAs in recent months with multiple landlords challenging retail CVAs, claiming that they are unfairly prejudicial or that there has been a material irregularity in the implementation of the CVA.
The challenge to the Debenhams CVA was brought by a group of Debenhams’ landlords and it was funded by Sports Direct. The specific grounds of challenge were:
- the landlords do not constitute ‘creditors’ for future rent and the CVA went beyond the scope of the Insolvency Act 1986 (IA 1986) in compromising claims for future rent;
- in reducing the rent payable under the lease, the CVA was automatically ‘unfairly prejudicial’ to the landlords;
- the removal of the landlords’ rights to forfeit the leases as a result of the CVA or as a result of a CVA related event went beyond the scope of the IA 1986;
- the landlords were treated less favourably than other unsecured creditors without any proper justification;
- inadequate disclosure was given by the Debenhams directors within the CVA proposal in respect of certain security granted by Debenhams, which amounted to a ‘material irregularity’.
The High Court in England rejected the landlords’ challenge on all grounds except for the one related to the removal of the landlords’ rights to forfeit the leases.
The court said that as a matter of jurisdiction, future rent can be included within a CVA. Although it is not a ‘presently provable debt’, it is a financial liability of the tenant while the term of the lease continues.
The reduction of rents payable under the lease was not automatically unfairly prejudicial to the landlords, the ruling said. The Debenhams CVA was fair because it permitted the landlords to bring an end to the varied lease if they wished to do so and the CVA did not impose any new obligations; it only varied existing obligations.
Retailers will be reassured by the court’s findings. However, any retailer considering a CVA will still need to ensure its CVA terms are not unfairly prejudicial. In particular, the court will not allow a landlord’s right of entry to be varied and it will be reluctant to permit a rent reduction which takes the rent below the market rate.