Businesses in the retail and hospitality sectors are bearing the brunt of the economic fallout caused by Covid-19 lockdowns, resulting in ever more company voluntary arrangements (“CVAs”).
What is a CVA?
In brief, a CVA is a statutory insolvency procedure used by businesses as a restructuring tool to compromise liabilities. It allows an insolvent company and its creditors to agree the repayment of a portion of the company’s debts over a specified period of time. A CVA is approved if 75% (by value) of creditors vote in favour of it.
The “Unjustly Targeted” Landlord
In most CVAs, lease liabilities are compromised. Often, lease liabilities are compromised by the terms proposed by the CVA, while other creditors are not substantially effected.
In two recent high profile decisions (Lazari Properties 2 Ltd v New Look Retailers Ltd [2021] EWHC 12909 and Carraway Guildford (Nominee A) Ltd and others V Regis UK Limited and others [2021] EWHC 1294), landlords sought to challenge the CVAs.
Focusing upon the New Look decision, the landlords’ challenge to the CVA was threefold:
- a. Jurisdictional challenge - the proposal was not a “arrangement” for the purpose of the Insolvency Act, because there are different classes of creditors receiving different treatment and no give and take between the parties;
- b. Material irregularity - there were material irregularities in the calculation of the landlords’ claims for voting purposes; and
- c. Unfair Prejudice challenge - the landlords were unfairly prejudiced by the proposal because the requisite majorities at the creditors’ meetings were secured with the votes of creditors who claims were not impaired by the CVA, and the modifications to the terms of the leases imposed on landlords were unfair.
All of the landlords’ challenges were rejected by the Court, on (amongst others) the following bases:
- a. A CVA which provides for different outcomes for different groups of creditors does not make it unfairly prejudicial on that basis.
- b. There was sufficient “give and take”. The leases remained in place; the proprietory rights of the landlords had not been compromised by reducing rents to nil.
- c. In respect of the modification to the lease terms (including the imposition of turnover rents), any potential prejudice caused by imposing lease modifications was avoided by granting landlords a termination right in the CVA. It was therefore key that the break rights granted landlords a way to extract themselves from the terms imposed by the CVA if they considered them unfair.
- d. The fact that the majority votes to approve the CVA is achieved by the votes of unimpaired creditors is not necessarily unfairly prejudicial.
The Regis case was heard by the same Judge as in the New Look case, and covered many of the same issues. The Judge also dismissed the landlord’s challenges to the Regis CVA.
What now for landlords?
Unless reversed on appeal (leave to appeal has been granted), these decisions will come as a blow to landlords, who are also grappling with substantial rent arrears, and whose remedies have recently been curtailed further by the Government’s announcement on 16 June 2021.
Whether these CVA decisions will encourage a wave of further retail CVAs, and whether there are any options left for landlords seeking to challenge a CVA, remains to be seen…..
