CVAs: good news for landlords

Company voluntary arrangements (CVAs) have recently been in the headlines, particularly in the context of failing retailers.

CVAs are a means by which a struggling company can come to an arrangement with its creditors as to the payment of its debts. Those creditors often have to take a hit - landlords in particular.

In a recent High Court decision* a trading company ran into financial difficulties, a major problem being property costs. Many of its stores were too big and a significant number over-rented. Without a reduction in its financial obligations, the company could not meet its debts. A CVA was therefore proposed and approved, imposing rent reductions on the company’s landlords, with the respondent landlord receiving just 75% of the rent payable under its leases.

The terms of the CVA provided that, if it terminated, the concessions under the CVA were to “be deemed never to have happened”.

The company was ultimately put into liquidation and the CVA was terminated. The landlord claimed that under the terms of the CVA, termination meant that it was retrospectively owed the full amount of the rent due under its leases and, what’s more, that the rent for the period that the company’s administrators traded from the premises should be paid as an administration expense in priority to other debts.

The court agreed, rejecting the argument of the company’s liquidators that a claim for the full rent on the failure of the CVA was unenforceable as a penalty. Nor did it contravene the rules on distribution amongst creditors on an insolvency by increasing the company’s liabilities to the landlord - it simply restored landlord to its original position. The court also confirmed that the rent due while the administrators traded from the premises was payable in priority as an administration expense.

Good news for landlords faced with struggling tenants - and a reminder to try to ensure that the terms of any CVA limit their exposure in this way.

*Wright and Rowley as joint liquidators of SHB Realisations Ltd v the Prudential Assurance Company Ltd [2018] EWHC 402 (Ch)