Challenging a tenant CVA

Challenging a Tenant CVA

Company Voluntary Agreements ("CVAs") have been the go-to option for struggling retail businesses over the pandemic period. While all creditors are generally treated equally under a CVA, landlords are increasingly finding themselves at the short end where they are the only, or one of, a very small pool of, creditors taking a hit. It is now more important than ever that a landlord knows the circumstances by which they can challenge a tenant's CVA.

In a CVA, the company restructures its unsecured liabilities by reaching a compromise with at least 75 per cent (by value of debt) of creditors who vote. The CVA binds all creditors entitled to vote. It can leave landlords disadvantaged by compromises, which exclude them.

However, all is not lost for the undermined landlord, as a CVA can be challenged.

What can a landlord do?

A landlord can seek an order within 28 days from court to revoke or suspend the decision to approve a CVA where:

1. The CVA has 'unfairly prejudiced' the interests of the creditor;

2. There has been 'material irregularity'; or

3. Any terms of the CVA fall outside the scope of the governing legislation.

Unfairly Prejudiced

Each case is taken on its own facts. Examples include:

1. When comparing the projected outcome of a CVA with the projected outcome of a realistically available alternative process, such as liquidation or administration, the result is more positive in a creditors' favour. This creates a base level which the CVA cannot go below and, if that occurs, then revocation or suspension may be sought; and

2. While there is nothing to prohibit treating creditors differently, if the treatment of creditors under the CVA is different from one another such treatment must be justified by the overall effect of the CVA.

Material Irregularity

Material irregularity arises from the conduct of the procedure used to consider the CVA proposal and is determined on a factual basis. For example, a challenge can be made on the grounds of the valuation which is placed on a creditor's claim, as this will proportionately affect the weighting of their vote. This can be particularly relevant to landlords as the value of their claim will be based on rental arrears, future rent and potential dilapidations claims. Dilapidations claims are notoriously difficult to effectively quantify.

Landlords proprietary rights cannot be extinguished by a tenant CVA

Essentially a CVA alters the terms of a tenant's lease liabilities for the period the CVA is in force. Generally, a landlord cannot challenge the lease terms being re-written, however, some proprietary rights cannot be altered by a CVA, such as forfeiture.

Altering the proprietary rights of a landlord falls outside the scope of insolvency legislation and therefore, provisions which do so can be severed from the CVA (assuming there are valid severance provisions). A failure to do may give the landlord grounds to seek revocation or suspension of the CVA.

Future Challenges

Recent challenges by landlords in the courts are a cause for hope in regularising the influence and say a landlord may have, when faced with a tenant entering into a CVA.

While lease obligations may not be viewed as necessary debts to be paid for the continuation of business trading, in the same way that suppliers are, landlords challenging tenant CVAs have found support through the courts when seeking to uphold landlord proprietary rights. There is no doubt that there is scope for future challenges, especially in circumstances where a CVA attempts to bring rent below the market rate.