CVAs & Landlords: A Limited Arrangement?

Further to our recent post on the impact and challenges commercial landlords face by entering into company voluntary arrangements (CVAs), Legal Director Phil Parkinson returns to the subject as an increasing level of case law illustrates the issue of the level of consideration landlords are proportionately afforded as part of the growing “rescue culture”.

Since our previous post, we have seen - unsurprisingly – a mounting number of cases relating to the use of CVAs to accompany and assist the drive to viably restructure retail and commercial companies via a route by which insolvency can be avoided and creditor obligations met. Compounded by the recent announcement that restrictions on commercial evictions, statutory demands under the Corporate Insolvency and Governance Act (CIGA) and CRAR are to be extended, this post seeks to offer commentary and advice based on short summaries of some recent and notable cases.

In Lazari Properties 2 Ltd v New Look Retailers Ltd [2021] EWHC 1209 (Ch), landlords challenged the CVA on the grounds that there were inaccuracies in the proposal and failings in the calculations used for landlord voting, that the CVA was a collection of separate agreements with differing creditors and that the vote in favour of the CVA was secured by those whose claims were unimpaired by the arrangement.

This culminated in the decision that the mistakes did not amount to material irregularity, that a CVA is not necessarily unfairly prejudicial just because the majority in favour is achieved from the votes of the unimpaired creditors and on the point of jurisdiction, CVAs are not limited to arrangements where all creditors can consult together with a shared common interest.

It will be interesting to note how the planned appeal will seek to challenge and reverse these decisions given that this outcome establishes a precedent for re-drafting of future lease obligations as part of a CVA and will likely challenge the unfairness of the majority vote outcome.

The recent Carraway Guildford (Nominee A) Ltd and others v Regis UK Ltd and others [2021] EWHC 1294 led to the revocation of the Regis CVA, although realistically this has little impact (as it had already terminated in late 2019). However, the case is noteworthy as it is similar to the New Look case, in that the grounds of unfair prejudice and material irregularity regarding modification to lease terms were dismissed for the same reasons.

Perspective:

It is becoming more evident that what constitutes material irregularity or unfair prejudice will be assessed on a case-by-case basis, rather than by applying any uniform or blanket testing.

Despite further moratoria and greater use of CVAs, they do not close off a landlord’s rights entirely. As discussed in our previous CVA blog, landlords may seek to pursue arrears via third party guarantors to help protect their position in the event of tenant insolvency. If there are potential breaches of covenant, such as carrying out unauthorised alterations, serving a s146 notice and requiring the breach to be rectified could be applied. There is also the point of whether a CVA contains a lease termination right, thus providing a mechanism by which landlords can effectively mitigate the effect of lease modifications – but it is important to note that this should not create a more financially disadvantageous  position than if the CVA had not been approved. Landlords should also continue to engage with their commercial tenants in order to identify signs of potential or imminent distress.

With regard to the challenges surrounding material irregularity, prejudice and rights to terminate granted by a CVA against the provisions of the LTA 1954, coming months will continue to see a wealth of cases to analyse and evaluate. We continue to watch closely, and of course, keep you posted.

Contact Phil Parkinson: p.parkinson@jbleitch.co.uk