Lawbite: The retail CVA – Lessons from the Debenhams case
9th October 2019
(1) Discovery (Northampton) Limited (2) Discovery (Nuneaton) Limited (3) Southampton Estates Limited (4) Discovery (Torquay) Limited (5) Discovery (Folkestone) Limited (6) Discovery (Harrogate) Limited v Debenhams Retail Limited (2) James Robert Tucker (3) Edward Boyle (4) Glas Trust Corporation Limited  EWHC 2441 (Ch)
A number of Debenhams’ landlords recently had their challenge to the Debenhams CVA rejected by the High Court on all but one ground
The CVA was driven largely by a need to address what was regarded as unsustainable property related liabilities and as such principally affects the company’s landlords and local authorities. Leases were grouped into six categories distinguished by reference to the financial performance and sustainability of the rent for the individual properties.
The various landlords involved in this case had applied (funded by Sports Direct) to set aside the CVA, approved in May of this year, on five grounds including that the CVA went beyond the jurisdiction conferred by s.1 of the Insolvency Act (the “1986 Act”), was unfairly prejudicial to them and that some provisions were a “material irregularity”.
Whilst they were not successful in setting aside the CVA they did succeed on one ground and achieved an amendment to the provisions in the CVA relating to their right as landlords to forfeit leases. The court decided that the right to forfeit is a proprietary right that cannot be altered by a CVA. As such a provision in the CVA which purported to waive landlords’ right to forfeit were deleted. Otherwise, the CVA was found to be valid and remains enforceable.
- Whilst the CVA survives, the court’s conclusions as to forfeiture provisions in CVAs will be welcome to Debenhams’ landlords and any facing similar restrictions. Even if the applicant landlords choose not to forfeit other landlords (even those who are largely unaffected by the CVA) may choose to forfeit which means Debenhams may lose some of its more valuable premises. Those landlords concerned will, no doubt, take care to ensure their actions do not constitute an act of waver if they wish to preserve the right to forfeit
- When deciding on the issue of whether the rent reduction under the CVA was unfairly prejudicial to the landlords, the Court found it significant that none of the landlords had argued that the reduced rent was below current market rent for the various premises. The evidence from one of the CVA’s supervisors that each of the premises concerned were over-rented was unchallenged. As such, landlords seeking to challenge future CVAs may be more successful in an unfair prejudice argument if the rent reductions are below market rent.