Discovery (Northampton) Limited and Ors - v – Debenhams Retail Limited (2019) – The High Court considers the impact of CVAs on a Landlord’s right to forfeit
It was not long ago that almost every high street in the UK was anchored by the then retail giant Debenhams. It will not have escaped most of you that Debenhams have, amongst others, been the subject of some very public financial woes. To resolve these issues and to try and stay afloat, Debenhams entered into a Company Voluntary Arrangement (“CVA”).
CVAs are a contractual mechanism through which a company can restructure its debts and liabilities to allow it to continue to trade for the benefit of its creditors and with a view to reviving itself.
Like with most CVAs, the focus of the Debenhams’ CVA was to attempt to reduce its liability under various leases. Under the terms of the CVA, the various leases held by Debenhams were split into 6 categories. Each category set out the way in which the leases within that category would be treated during the course of the CVA. For example, landlords of category 2 leases would be entitled to 75% of the contractual rent during the first five years of the CVA being in place but landlords of category 3 leases would only be entitled to 65% of the contractual rent for the same period. The CVA also set out what rights and obligations the respective landlords would retain and release under their leases with Debenhams.
After the Debenhams’ CVA had been approved, six landlords challenged the CVA on five grounds;
1. The landlords were not “creditors” for future rent within the scope of Part 1 of the Insolvency Act 1986 (“the Act”) and therefore the CVA went beyond the jurisdiction conferred by the Act in binding the landlords;
2. A CVA cannot operate to reduce rent payable under the leases, because it was either automatically unfairly prejudicial under the Act or because there is no jurisdiction within the Act to do so as it had the effect of changing the terms of the leases;
3. That in removing any right of the landlord to forfeit which would arise as a result of the CVA or any CVA related event, the CVA altered the landlords’ proprietary rights, which was beyond the jurisdiction conferred on the CVA by Part 1 of the Act;
4. The landlords were treated less favourably than other unsecured creditors under the CVA without proper justification;
5. The CVA failed to comply with the content requirements under the Insolvency Rules.
The challenge was heard by the High Court on 19 September and the court dismissed four of the five grounds.
The only successful challenge was in respect of the terms of the CVA which required the landlords to waive and release any rights to forfeit (i.e. the right to take back possession) that existed under their leases in respect of any events associated with the terms of the CVA. The applicant landlords argued that the terms of a CVA could not limit or release a landlord’s right to forfeit a lease held by a company subject to a CVA in this way. The court agreed and ordered that the terms of the CVA be amended to remove reference to the forfeiture restraint provisions.
Almost all commercial leases will contain terms that allow the landlord to forfeit the lease of the property in circumstances where the tenant breaches the terms of that lease. It is also not unusual for the landlord’s right to forfeit to arise where the tenant becomes insolvent or subject to any of the processes covered by the insolvency legislation. The Debenhams’ CVA attempted to restrain the right to forfeit on that basis for all affected landlords.
The court found that a landlord’s right to forfeit was a property right rather than a contractual right or security interest. Therefore, it could not be compromised by the CVA because such rights are beyond the scope of the insolvency legislation.
Accordingly, the court decided that the right to forfeit could not be restrained by the terms of a CVA and made orders requiring the relevant provisions of the CVA to be deleted. While the underlying right to forfeit cannot be compromised, the covenant which the tenant is in breach of, which triggers the right to forfeit (i.e. payment of rent), can still be modified by the terms of a CVA and that will be binding on an affected landlord. However, this would not prevent a landlord seeking to forfeit because the tenant entered a CVA process (assuming the lease contains the appropriate right to do so).
So what does this mean for commercial landlords who are burdened with a tenant in the midst of a CVA? It may mean that they are now entitled to require the deletion of the forfeiture restraint provisions in the relevant CVA and then invoke their right to forfeit the lease.
Much will depend on the circumstances of each situation, the terms of the lease and the CVA but the decision does appear to have returned to landlords a right and remedy the CVA process had sought to eliminate.
If you have any queries about the case or how this might be applicable to you please do get in contact with your usual Forsters contact.
Liberty Chappel is an associate in our Property Litigation team.