In September 2020, the retailer New Look, said that a company voluntary arrangement (“CVA”)) was an “absolute necessity” to safeguard 11,200 jobs, after the pandemic led to the closure of its stores. A CVA arises where a company reaches an agreement with its creditors over repayments including the restructuring or forgiveness of a portion of its debts. In order to be approved, the CVA requires support from three quarters of the creditors to the company.
New Look’s CVA asked landlords to agree to rent based on a percentage of sales for 402 of its stores – an increasing trend often referred to as turnover based rent. In exchange for moving to this different type of rental arrangement the landlords were given more rights to take back stores to re-let to other tenants. A CVA is a general restructuring tool -the framework it operates within contains no specific provisions relating to compromising leases and there is no prescribed format for a leasehold CVA. However, CVAs have been used numerous times since the first JJB Sports CVA almost thirteen years ago. CVAs have been used to move rent from quarterly to monthly payment, change the amount of rent and dilapidations payable moving forward as well as giving tenants the ability to exit certain stores by reducing rent and dialpidations to zero after a specified period. Moving leases to turnover based leases is relatively new but an increasingly popular approach
The Landlords, including Land Securities and British Land, lodged an objection to the CVA arguing that the switch to turnover rent “fundamentally rewrites” leasing agreements. They argued that New Look as wrong to use a CVA to create different arrangements between different types of creditor. Their view was that they were put in an unfair position because the CVA was passed with the votes of creditors not affected by the proposals to the same extent: almost two fifths of the landlords voted against the proposals, but the CVA still proceeded because the other unsecured creditors such as suppliers voted in favour. The landlords also argued that because the proposal was part of a wider financial restructuring that also involved bondholders who were treated differently, it fell outside the scope of a CVA. From a legal perspective a CVA can only be challenged by dissatisfied creditors if there has been a material irregularity or the proposal is unfairly prejudicial. For an unfair prejudice based application to succeed a creditor must show that the CVA is not only prejudicial to its interests (which obviously a CVA will be to any creditor) but also that the prejudice suffered by that creditor or category of creditors is unfair. The test tends to be down two routes – “horizontal fairness” – whether a creditor has been treated less favourably compared with other creditors in a comparable position; and “vertical fairness” – whether creditors are in a better position than they would be in the event of the compay’s liquidation or administration. In this particular case the landlords were particularly focused on the horizonal fairness aspect of unfair prejudice.
The arguments put forward by the landlords were rejected on all counts by Justice Zacaroli in the High Court. Providing some much needed clarity, Justice Zacaroli said that the fact that landlords could be outvoted by other creditors did not mean that their interest were being unfairly prejudiced. The case will provide renewed confidence to retailers coming out of lock down who are considering their options. Although there is a new restructuring tool available in the Corporate Insolvency and Governance Act 2020, this is a significantly more complex process involving far greater court scrutiny. From a landlord’s perspective, even if they are the sub-set of creditors most adversely affected by the use of the CVA, this has no bearing – 75% or more of creditors voting in favour will pass the CVA. Will the landlords appeal? An attempt to challenge a Debenhams proposal was rejected in 2019 and Justice Zacaroli will soon preside over a separate case involving a challenge to a CVA used by Regis, a chain of hairdressing salons that implemented its CVA in 2018. The Virgin Active restructuring is also being reviewed. For now, a CVA remains an important tool for retailers looking to restructure their lease arrangements, much to the chagrin of landlords who seem to have little that they can do about it.
For further information, please contact arch.law Portfolio member Paul at paul@arch.law
