UK court rejects landlords' challenge to Debenhams CVA

Out-Law Legal Update | 24 Sep 2019 | 12:47 pm | 3 min. read

Court rejected landlords' challenge to Debenhams' CVA in what will be seen as a victory for retailers and a validation of 'landlord only' CVAs.
  • Landlords' challenge to Debenhams CVA rejected on four out of five grounds
  • The CVA will continue subject to deletion of provisions restricting landlords' forfeiture rights
  • Debenhams Retail Limited [2019] EWHC 2441 (Ch)

A Company Voluntary Arrangement (CVA) is a legally binding arrangement entered into by a company in financial difficulty with its unsecured creditors under which the creditors' debts can be discounted and which can vary existing contractual terms between the company and its creditors.

The use of 'landlord only' CVAs has become extremely popular in recent years as a method of reducing rental costs which retailers see as overly onerous. There has been a backlash against such CVAs in recent months with multiple landlords challenging retail CVAs, claiming that they are unfairly prejudicial or that there has been a material irregularity in the implementation of the CVA.

The challenge to the Debenhams CVA was brought by a group of Debenhams' landlords and it was funded by Sports Direct. The specific grounds of challenge were:

  • the landlords do not constitute 'creditors' for future rent and the CVA went beyond the scope of the Insolvency Act 1986 (IA 1986) in compromising claims for future rent;
  • in reducing the rent payable under the lease, the CVA was automatically 'unfairly prejudicial' to the landlords;
  • the removal of the landlords' rights to forfeit the leases as a result of the CVA or as a result of a CVA related event went beyond the scope of the IA 1986;
  • the landlords were treated less favourably than other unsecured creditors without any proper justification;
  • inadequate disclosure was given by the Debenhams directors within the CVA proposal in respect of certain security granted by Debenhams, which amounted to a 'material irregularity'.

Had the challenge been successful, it was anticipated that Debenhams would swiftly enter into administration.

The High Court in England rejected the landlords' challenge on all grounds except for the one related to the removal of the landlords' rights to forfeit the leases.

The court said that as a matter of jurisdiction, future rent can be included within a CVA. Although it is not a 'presently provable debt', it is a financial liability of the tenant while the term of the lease continues.

The reduction of rents payable under the lease was not automatically unfairly prejudicial to the landlords, the ruling said. The Debenhams CVA was fair because it permitted the landlords to bring an end to the varied lease if they wished to do so and the CVA did not impose any new obligations; it only varied existing obligations.

It found that a CVA cannot vary a landlord's right to re-enter its premises as such a right amounts to 'property' belonging to the landlord. While a CVA can vary the conditions under which the landlord can exercise that right, the CVA cannot vary the right itself. There was proper justification for the less favourable treatment of landlords in comparison with other unsecured creditors, particularly suppliers, the court said. The landlords had been providing long term accommodation at above market rates whereas payment in full to suppliers, which are providing goods and services on an order-by-order basis, was justified by the need for business continuity.

The court made the important point that there was no suggestion that the rent being paid to the landlords was being reduced to a level below the market rate. The court was not persuaded that there was a substantial chance that the creditors would have voted differently on the CVA had the CVA proposal contained disclosure of further information relating to the potential for any administrator to overturn security granted by Debenhams.

Although the landlords were successful on the removal of the landlords' rights to forfeit the leases, this was not enough to overturn the CVA. Instead, the court ordered that the specific provisions restricting the landlords' forfeiture rights be deleted. Subject to any appeal, the effect of this decision is that the Debenhams CVA has not been overturned and will continue. 

Retailers will be reassured by the court's findings. However, any retailer considering a CVA will still need to ensure its CVA terms are not unfairly prejudicial. In particular, the court will not allow a landlord's right of entry to be varied and it will be reluctant to permit a rent reduction which takes the rent below the market rate. 

James Hillman is a restructuring expert at Pinsent Masons, the law firm behind Out-Law.