In the recent case of Discovery (Northampton) Limited v Debenhams Retail Limited, six landlords challenged a company voluntary arrangement (CVA) which attempted to compromise Debenhams’ liability for future rent and business rates as well as landlords' rights to forfeit the leases.
This challenge was followed with interest by landlords concerned at the increasing use of CVAs. The court's decision provides clarification on the extent that CVAs can compromise the liabilities of tenants and options for landlords.
Grounds of challenge
The CVA was challenged on five separate grounds:
- The landlords were not “creditors” for future rent within the scope of the Insolvency Act 1986, and so the CVA went beyond what was permitted by the Act.
- A CVA cannot operate to reduce rent payable under the leases – either because this is unfairly prejudicial to landlords, or because the Act gives no power to change the terms of the leases.
- Most leases give the landlord a right to forfeit if the tenant proposes a CVA. The CVAs in this case included a clause attempting to remove this right. In doing so, the CVA altered the landlords’ proprietary rights and this went beyond the powers in the Act.
- The landlords were treated less favourably than other unsecured creditors without proper justification.
- The CVA failed to comply with the content requirements under the Insolvency Rules.
Decision
The court rejected grounds 1, 2, 4 and 5.
On ground 3, the court agreed that removing the landlords' right of forfeiture encroached on their proprietary rights, something a CVA cannot do. The court directed the CVA to be modified to delete the offending forfeiture provisions, and declared that it otherwise remained valid.
The future of CVAs
This decision provides useful clarification. It is now clear that:
- Future rent can be compromised under a CVA.
- The fact that future rent is reduced under the CVA does not inevitably render it unfair, the court will consider the CVA and the impact on landlords in the round. Here the court found it significant that even with the reduced rent, the landlords were still getting the market rent.
- A CVA cannot vary a forfeiture right in a lease.
The decision will be of some comfort to landlords to know rights to forfeit the lease will be protected. However, whether a landlord will want to forfeit a lease in this market remains to be seen.