Debenhams, the well-known high-street retailer, entered a CVA last year. A CVA is a process designed to allow the company to trade through its difficulties. The Administrators devise a strategy which should result in creditors receiving payment (albeit not necessarily everything they are owed) whilst streamlining the business to increase profits going forward.
This wasn’t Debenhams’ first attempt at restructuring its business. In 2010 Debenhams sold properties which it owned and leased them back. The leases were for 30 years. In each of the first ten years the rent would increase by a formula prescribed in the leases. Thereafter there would be periodic “upwards only” rent reviews. Essentially the rent paid by Debenhams was dictated by the lease and was not connected to the market rate.
To keep trading Debenhams needs to keep its shops. The 2018 CVA identified unsustainable property costs associated with certain stores and sought to reduce them by altering the leases. The CVA proposed the following changes to the leases:
- Reduced Rent
- Remove Landlord’s right to forfeit
- Remove Debenhams’ liability for dilapidations claims
- Grant Landlord an initial, one off, right to terminate the lease
The landlords, funded by Sports Direct, in Discovery (Northampton) Limited and others -v- Debenhams Retail Limited  EWHC 2441 (Ch) challenged the right to do this in a CVA pursuant to s.6 Insolvency Act 1986 on the following grounds:
- The CVA goes beyond the jurisdiction of s.1 of the Insolvency Act 1986, in particular they alleged:
- Future rent cannot be compromised in a CVA
- A CVA cannot remove the right to forfeit
- Pursuant to s.6 of the Insolvency Act 1986 the CVA is unfairly prejudicial to the interests of a creditor/group of creditors, in particular:
- Reducing the rent is unfairly prejudicial
- The CVA treats the landlords less favourably than other creditors
The landlords only succeeded on one ground – the Court decided that the right to forfeit is the property of the landlord and cannot be varied by a CVA. The court deleted this provision from the CVA. The remainder of the CVA is valid and enforceable.
What can we take from this case? It is a first instance decision. It may be appealed, but, for now, we know:
- Future rent can be included in a CVA (this reinforces the view in earlier decisions in Doombar -v- Alltime Securities Ltd (no.1) and Re Cancol Ltd)
- Reducing the rent payable in a lease is not automatically unfair. There must be protection in place for the landlord. In this case, the one-off right for the landlord to terminate meant the landlord wasn’t obliged to accept reduced rent. It could terminate the lease if the reduced rent was not acceptable. For that reason, the alteration was not “unfair”.
- If a landlord is treated differently from other creditors it may be justified by the need for business continuity. The court found that if the landlords were expected to take reductions in rent to below the market rate it would have been unfair and perhaps unjustifiable, but in this case the reductions did not reduce the rent below the market rate.
Many retailers entered leases in the heyday of the shopping centre. Leases at premium rents with upward only rent reviews. The landscape has changed, and retail units no longer command the same level of rent. Retailers with old leases will be paying significantly more per square foot than those with newer leases. We’re reaching a stage where long-established high-street retailers who have not been through an insolvency process are in a worse position than those who have.
This is worrying for landlords. Landlords of glossy shopping malls have business models based on projected income. That income could be significantly reduced if tenants use CVAs to reduce their rental liability to today’s market rates.
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