Company Voluntary Arrangements: Whether a tenant’s CVA can compromise a landlord’s claim for future rent (Discovery, Northampton Ltd and others v Debenhams Retail Ltd and others – 2019)

In a faltering retail economy this highly relevant case looks at how a tenant’s proposed CVA can impact on a landlord’s claim for future rent and whether the CVA is valid and enforceable.

The background

In Discovery (Northampton) Ltd and others v Debenhams Retail Ltd and others [2019], the tenant retailer proposed a CVA following a pre-pack administration acquisition. The CVA proposed to, amongst other terms, reduce the rent payable under various leases, prevent the landlord from exercising rights of forfeiture and release the tenant company from dilapidations claims.

Six Landlords challenged the CVA on five different grounds. Amongst these, it was argued that the CVA could not compromise a claim for future rent, as future rent is not a debt but simply an unearned future payment. The landlords should not therefore be viewed as creditors under the Insolvency Act 1986. Further, the CVA was argued to be unfairly prejudicial in that it reduces rent payable and the removal of the landlords’ rights to forfeit the leases removes the landlords’ established rights under the leases.

The decision

The High Court rejected four out of five arguments presented by the landlords. The court found that future rents could be included in a CVA, classing them as pecuniary liabilities which arise out of an existing legal relationship; in this case, a binding lease which would obligate the tenant to pay rent. The Insolvency Act therefore applied, as did the CVA.

Further, it was not necessarily unfair or unjust to reduce future rent. The CVA varies the obligation to pay rent contained in the lease, and reducing rent does not automatically render a CVA unfair.

The landlords succeeded in their argument that the CVA could not vary a right of forfeiture and re-entry. This is a proprietary right enjoyed by landlords and should remain valid.

Advice and action

It will likely be felt in the industry that this decision is prejudicial to landlords, allowing the CVA to take precedence in many areas over contractual and proprietary rights and obligations of the parties. In the wider context, and in an uncertain economy, we believe it is likely that courts will consider the overarching company restructure as a priority, allowing them to compromise rent obligations where there is a possibility that business rescue may be achieved.

Although retaining the right to forfeit, landlords of commercial properties occupied by tenants in potential financial difficulty should be aware that their interests may well be affected by a future CVA. Suggested action may be to enter into discussions prior to a CVA being introduced, allowing a landlord a fair opportunity to negotiate more favourable terms.

To discuss our commercial property litigation expertise further, please contact Senior Associate Sarah Hall: s.hall@jbleitch.co.uk