Does a company voluntary arrangement permanently vary the terms of a lease?
In this three part blog we highlight three recent court decisions concerning landlord rights and insolvency, which provide cautionary warnings and surprising twists. The questions we consider are:
- Does a company voluntary arrangement (“CVA”) permanently vary the terms of a lease?
- Can a landlord be forced to accept a surrender of a lease?
- What are the consequences of taking money from a rent deposit if the tenant company is in administration?
In part 1 we consider the first question.
Does a company voluntary arrangement (“CVA”) permanently vary the terms of a lease?
On 26 October 2018 creditors of the hair and beauty chain Regis approved a CVA, but despite overwhelming support the company’s landlords issued an application to challenge the CVA alleging (amongst other grounds) that impairments to the landlords’ leases and other changes in the terms were unfair.
On 23 October 2019, Regis went into administration. It is perhaps therefore surprising to learn that the CVA challenge brought by the landlords is continuing. Why is this?
The terms of the Regis CVA provided that if the company entered administration the CVA would terminate. As such, the former supervisors applied to strike out the landlords’ challenge. The landlords resisted this application on the basis that they wanted the Court to revoke the CVA.
Why does it matter whether the CVA is terminated or revoked?
If the CVA is terminated, then there is an argument that the landlords’ rights and claims have been permanently varied. But if the CVA is revoked, any such variations are deemed never to have had any effect and the landlord’s rights and claims under the leases are therefore restored in full.
The difference between termination and revocation particularly matters for the Regis landlords because for some, rent payments were significantly reduced.
The Regis CVA did include a clause that has become commonplace in many retail CVAs. That is, it provided that upon termination of the CVA, any compromise or release effected by the CVA was deemed never to have happened. However, the specific wording in the Regis CVA also carved out from this restoring provision, any variations that which had been made to the lease terms.
Therefore, if the compromised terms in the CVA amount to a variation of the leases, then the lease terms may have been varied permanently.
This distinction potentially impacts the landlords’ position as creditors in an administration in several ways. Firstly, in terms of the amount landlords can claim for unpaid rent. Secondly, in terms of the quantum of any claim landlords have for rent to be paid as an expense of the administration (to the extent that the properties were used for the benefit of the administration). Thirdly, it impacts landlords’ ability to recover rent from rent deposits or guarantors if rents due under the lease have been permanently reduced.
There are a number of other points which the Court will consider, but for landlords the most important question is what are the terms of the lease post-termination of the CVA?
The hearing of the trial is due to take place in December and we will provide an update following the outcome.