Proposing a Company Voluntary Arrangement (CVA) is currently a popular option for companies facing financial difficulties. Creditors of companies such as BHS, Prezzo, Toys R Us, Maplin, Byron Burgers and New Look have all recently agreed to the companies operating under CVAs. Several other retailers are rumoured to be likely soon to follow suit.
The aim of a CVA is to help a company overcome its financial difficulties and continue to trade, and that objective is achieved by reducing the company’s outgoings. With rent often being one of the biggest of these, CVAs can often have a considerable impact upon landlords.
The impact of CVAs on creditors can be complex and well advised landlords should act with caution before approving them. The decision of the High Court in a recent case concerning the BHS CVA raises interesting questions about a company’s obligations following a CVA’s failure.
The BHS decision: impact on post-CVA liabilities
As is usually the case, one of the terms of the BHS CVA was that BHS’ landlords would accept a reduced rent. The CVA terminated, and BHS went into liquidation. The question for the court was whether Prudential, as one of BHS’ landlords, could claim the full amount of rent due under the lease and, if so, from what date?
The BHS CVA expressly stated that upon its termination “the compromises and releases effected under the terms of the CVA shall be deemed never to have happened, such that all Landlords and other compromised CVA Creditors shall have the claims against [the Company] that they would have had if the CVA Proposal had never been approved (less any payments made during the course of the CVA)”.
Prudential claimed that in light of this clause it should therefore receive all of the rent which fell due while the CVA was ongoing (not only the compromised amount), and that some of that should be as an expense of the administration.
The High Court ruled in Prudential’s favour, finding that the rent concession was only ever a temporary regime and that BHS had to repay the rental discounts which it had agreed with Prudential. While much of the judgment is fact specific, it made the following points of general application:
- The requirement to pay rent retrospectively at the higher rate following failure of the CVA was not a penalty (as BHS had claimed). It was a contractual arrangement which BHS had freely agreed to.
- The provisions of the CVA which varied the rent payment provisions of the leases did not operate to permanently vary the lease. A lease is a deed, and cannot be varied by a contract.
- As perhaps should be obvious, BHS could not select one part of the contract and insist on its full effect, whilst denying the proper effect of another.
Tips for landlords receiving a CVA proposal
- Review the CVA carefully. It is often the case that rent is due at a concessionary level, e.g. 75% of the rent payable under the lease. Make sure you are clear what concession you will be making, how long that concession is intended to last for, and in which scenarios that concession will come to an end. If, say, rent is payable at 75% during the CVA, at what rate does the CVA say it will be payable following the CVA’s failure?
- Be careful how you vote. The judgment in the BHS case does not consider the impact of the way in which the landlord voted. However, if a CVA which is not clear about the impact of failure on retrospective liabilities fails, then we question if a landlord will be estopped from arguing that it should be entitled to the contractual rent if it voted in favour of the CVA.
- Take a cautious approach if a CVA fails and take legal advice regarding what you may claim.
If in doubt, we recommend that you seek legal advice. CVAs are long, complex documents, often hastily drafted, and their provisions can be open to interpretation. While landlords may be keen to minimise their losses at the outset and try to avoid void periods, they should concurrently consider the other possible long term results of approving such concessionary arrangements.