Light for landlords in a month showered with large retailer CVA proposals

Many of us have been aware for some time of the difficulties faced by large retailers, particularly following the boom in online sales.

March has been a particularly depressing month for landlords of larger retail units, with New Look and Prezzo putting forward proposals for Company Voluntary Arrangements (CVA). Both New Look and Prezzo have proposed rental reductions, as well as store closures in an effort to reduce their overheads and save the companies as going concerns. They are seeking approval of their creditors at meetings later this month.

Landlords will of course need to scrutinise the CVA proposals very carefully and give consideration as to their commercial position before attending the meetings or engaging in a decision procedure, as well as to give thought to any modifications they may wish to put forward to the proposals in order to protect themselves in the future, even if the CVA fails.

When considering the CVA proposals, landlords may take some comfort from the decision given by the High Court in the decision fortuitously handed down on 6 March 2018 in the case of SHB Realisations Limited (formerly BHS Limited) (in liquidation) -v- The Prudential Assurance Company Limited [2018] EWHC 402 (ch) (for the sake of convenience I will refer to SHB Realisations Limited as “BHS”).

The salient facts are that on 4 March 2016 BHS proposed a CVA, which was subsequently approved. One of the provisions of the CVA was that some landlords would be paid reduced rents whilst the CVA was in force. The CVA did however provide that upon termination of the CVA, the compromises and releases under the terms of the CVA would be deemed to never have happened, such that all landlords (and other compromised creditors) would have the claims against BHS that they would have had if the CVA had never been approved (less such payments as were made to them during the CVA). BHS went into administration on 25 April 2016, but the CVA did not terminate until BHS entered into voluntary liquidation on 18 November 2016.
Prudential (a landlord to BHS pursuant to two leases) submitted to the Court that:

1. it was owed the full amount of rent payable under the leases (less the sums paid pursuant to the CVA) rather than the reduced amount agreed in the CVA
2. the higher rent payable pursuant to the leases (less the sums paid under the CVA) ought to be paid as an expense of the administration for the period during which the administrators of BHS traded from the premises in furtherance of the administration (namely between 25 April 2016 and 3 August 2016 when BHS was in administration but the CVA remained in force).

The Court found in favour of Prudential on issue (i), and the critical parts of the Judgment clearly show the importance placed by the Court on the terms of the CVA itself, with the Court stating:

“The Company [BHS] must accept the consequences, which (by the terms of the CVA itself) were that the concession would be unwound.”

“The liquidators cannot pick one part of the CVA (clauses 9 and 17) and reject another (clause 25.9): all these terms governed the way the concession was to operate. The clear intention of the CVA was to ensure that Landlords were not to be disadvantaged if the CVA were terminated, by being forced to continue a concession which was expressly conditioned to apply only while the CVA remained in force.  It is quite wrong therefore to characterise the rent concession as final and the provision unwinding it as somehow conferring upon the Landlords an advantage in the Company’s [BHS’] administration or liquidation. That is to turn the substances of the agreement on its head.”

The Court also found in favour of Prudential on issue (ii), holding that the additional sums falling due to Prudential on the termination of the CVA are payable as an expense of the administration for the period during which the administrators were in possession of the premises for the purposes of the administration. In other words, Prudential is entitled to be paid, as an expense of the administration, the difference between the reduced rent set out in the CVA for the period 25 April 2016 and 3 August 2016 (during which the CVA remained in force notwithstanding the appointment of administrators) and the higher rent reserved in the leases (less such sums as had been paid to them pursuant to the CVA).

The case highlights to landlords the importance of the terms of the CVA itself,  and the need to carefully consider and seek provisions in the CVA as to the unwinding of concessions in the event that the CVA fails.

Whilst the decision handed down on 6 March 2018 may not be the end of this issue, the news is more positive for landlords for now.

Our property and contentious insolvency dispute team advise stakeholders, including landlords and tenants on proposed and concluded CVAs as well as other rights arising from insolvency.