Dispute Resolution

The health of the high street has rarely been out of the headlines. Names such Toys R Us, Maplin and Poundworld have disappeared. Mothercare’s UK retail arm is now the latest established retailer to enter into administration. Others have taken a different route – Carpetright, Monsoon and Homebase are but a few of the household names to have entered into highly publicised CVAs.

The Company Voluntary Arrangement (CVA) is an insolvency process allowing a company to compromise its debts with its creditors. The aim is to keep a business trading and to achieve a better overall result for the creditors than alternative insolvency processes such as administration or liquidation

News has now broken that another high street tenant, Clintons, is in talks with landlords over a possible CVA. Before the CVA can proceed it will need at least 75%, in value, of the company’s creditors to approve it. If approved, it’s likely that landlords will bear the brunt of its impact with the closure of stores and cuts to rent being one of the more controversial aspects of most CVAs these days. It has been reported that Clintons urgently needs to shut 66 stores and is looking for widespread cuts to rents.

Once granted the CVA will bind all of the company’s creditors, potentially leaving landlords with significantly discounted rents and even leases being brought to an end.

That may not seem fair and many landlords may be left wondering what they can do in such a situation.

There are two grounds to challenge a CVA. The first is that the CVA is unfairly prejudicial – to succeed a landlord will have to show that an alternative process (such as liquidation or administration) would give it a better result or that it is unfairly being treated differently from other creditors. Being treated differently is not enough unless there is the added element of unfairness. The second ground is procedural irregularity, which normally arises when votes are miscounted, statutory timescales ignored or material information omitted from the CVA – all are unlikely given that all CVAs involve a Supervisor, who is an insolvency practitioner.

Challenges are not, however, unheard of. The recent unsuccessful challenge  by a group of landlords to the Debenhams CVA was the subject of considerable comment. Whilst the judge ultimately upheld the validity of the CVA, on different facts a landlord challenge might succeed.  One argument made by the landlords was that the rent reductions were unfair. No landlord, however, argued that any rent was to be reduced below the market rent. Accordingly it could not be said that this was unfair. It remains to be seen if this decision will be appealed.

Another challenge may soon be heard before the Courts with the Sunday Times reporting that Seventy Three Retail’s CVA, according to one landlord, “fell well short of best practice”. It remains to be seen if a challenge will be made – if it is going to be the landlord must act quickly as there are only 28 days following the CVA being approved in which to make a challenge.

If you are a landlord and you have any reason to doubt the validity of a CVA it is important that you act quickly. Expert advice should be taken on the process for raising a challenge and on the prospects of the court agreeing with you. For any landlords looking to learn more about CVAs why not sign up to our seminar “How to Deal with CVAs if you’re a Landlord” on 28 November 2019 in our Edinburgh Office?

David Ford

Solicitor at Brodies LLP
David qualified into Brodies’ Real Estate Litigation team in July 2018, following a litigation focused traineeship. He has built up considerable experience in disputes between commercial and residential landlords/tenants.
David Ford