CV-YAY for Landlords
A Company Voluntary Arrangement (“CVA”) enables companies experiencing financial difficulties to enter negotiations with their creditors, which may include landlords, with a view to securing more favourable payment terms and/ or restructuring their debt to help improve the debtor company’s financial position. However, until recently there was uncertainty over the original debt where that company subsequently went into liquidation and the CVA was terminated.
The case of collapsed retailer, BHS, provides useful guidance for some of those creditors.
BHS entered into a CVA in April 2016 whilst the administrators set about finding a purchaser for the business. Under the terms of this CVA Prudential Assurance Company Limited (“Prudential”), as Landlord to BHS, agreed a 25% discount on rent during the CVA period. Unfortunately, a purchaser was not found and BHS went into liquidation in November 2016, triggering the right to terminate the CVA. The CVA was subsequently terminated in December 2016.
Following termination of the CVA Prudential claimed the full amount of rent payable under the leases, on the basis it was payable as an expense of the administration. The liquidators argued that the termination provisions in the CVA amounted to an unenforceable penalty, and so the increased rental payments were not due.
The court rejected the liquidators’ argument and found that the rule against penalties should not apply to CVAs which are, in effect, hypothetical contracts imposed on the parties by a statutory process. Termination of the CVA did not mean that any new liabilities were imposed on BHS, it merely brought an end to the rent concession which was conditional on the CVA remaining in force. The administrators were obliged to pay the rent accruing under the leases during any period of occupation in the usual way.
The ruling in this case will come as welcome news for landlords, particularly given current market conditions where tenants may request similar concessions to help ease their financial pressures.
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