Recently there has been a lot of coverage of retail and restaurant tenants in financial difficulties. This time there are a combination of reasons for this (changing consumer demands, rates increases and the exchange rate to name a few), with the situation being more complex than the economic reasons of the credit crunch years.
One consequence of the current situation are some high profile companies (New Look, Carpetright, Mothercare, Prezzo and maybe House of Fraser) proposing to enter into company voluntary arrangements, better known as CVA’s.
The law around tenant insolvency is complex but the recent High Court case coming out of the British Homes Stores CVA provided some answers.
You will remember the headlines when BHS ran into financial difficulties in 2016. In March of that year BHS entered into a CVA with its creditors, which of course included its landlords. One of the terms of this arrangement was that BHS could pay a lower rent while the CVA was in place, the intention being that they could trade out of trouble.
Of course that did not happen, the CVA failed and BHS went into administration a month later. The landlords of BHS wanted to know where they stood in relation to rental payments, and a case was brought before the High Court by Prudential, with BHS being represented by its liquidators.
The High Court had to decide if the full rent was payable as part of the administration, rather than the reduced rent that would have been payable had the CVA succeeded.
The liquidators ran some clever arguments against returning to the full rent being payable based on contract law, but the Court decided that CVA’s should be treated differently to traditional contracts, as although there are elements of a contract to them they are brought about by an Act of Parliament. In this case none of the arguments put forward by the liquidators succeeded, and the Court decided that BHS was liable for the full rent as if the CVA had never taken place. In particular the Court confirmed that a lease could not be varied by a CVA, leases can only be varied by a deed.
More importantly for the landlords the Court also decided that the rent was payable as an expense of the administration, and therefore the landlords would be one of the first to be paid so long as the properties were still trading. When deciding this the Court fell back on the 2014 decision in relation to rental obligations and administration, and see our separate article on that court decision https://bdaily.co.uk/articles/2014/03/17/retail-administration-case-the-game-changer
The Court also decided that as well as rent being payable in the way it was before the CVA, this also extended to service charges and any other costs in relation to the lease, including increased rents from rent review.
Insolvency, particularly involving leases, is a complicated area of law. Short Richardson & Forth have specialists in both insolvency and commercial property so please contact us if you would like to discuss any of these issues further.