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CVAs – the drama continues

In June, 2018 we reported many landlords were feeling they were being forced to shoulder their tenants’ loss when those tenants sought store closures and substantial rental reductions by way of Company Voluntary Arrangements (‘CVAs’). The British Property Federation called upon the Government to undertake a much needed review of the CVA procedure which, the BPF claimed, ‘risks undermining the UK’s global reputation and deterring much needed investment into our town and city centres’. To date, nothing has happened in Parliamentary terms (Parliament having only one topic on its members’ minds: Brexit) but the courts have been asked to intervene (Discovery (Northampton) Ltd and others v Debenhams Retail Ltd and others [2019] EWHC 2441).

Giving judgement this month, Mr Justice Norris was asked to consider, inter alia, whether a CVA cannot reduce rent payable under leases because it is unfairly prejudicial to do so and whether landlords are treated less favourably than other unsecured creditors without proper justification. He held ‘the fact that future rent is reduced under the CVA does not inevitably transgress the requirements of common justice and basic fairness‘.

Further, the judge was satisfied that the reduced rents were at or above market rents although there ‘would have been “unfairness” if landlords were expected to take reductions in rent to below the market value of the premises concerned’. He was not swayed by the argument that by making beneficial use of premises let to it, the tenant company must pay the full contractual rent referable to the particular period of occupation and could not unilaterally reduce the contractual rent. He declared a CVA can vary existing obligations but not create new ones. A right of forfeiture within an existing lease is, however, a proprietary right that cannot be altered by a CVA. Of course, landlords are unlikely presently to exercise a right to forfeit a lease of retail premises as the likelihood of re-letting is often remote.

Mr Just Norris recognises, in his judgement, that the applicatns are likely to appeal – so, watch this space!

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