Where Are Landlords Now?
It has been a busy couple of weeks of court decisions for landlords to keep track of. Here is a roundup of some of the key developments and how they impact landlords.
What is a CVA? – New Look & Regis
A Company Voluntary Arrangement (CVA) is a legally binding agreement between a company and its creditors, which allows the company to restructure or renegotiate its liabilities – for example, by paying only a proportion of the sums due, altering payment frequencies, or offloading some liabilities altogether.
What about a Restructuring Plan (RP)? – Virgin Active
An RP is a court-supervised process for restructuring, which can be imposed on a dissenting class of creditors. An RP is available where a company has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern.
An RP will usually be proposed by the company. Provided the RP contains some form of compromise and is designed to deal with a company’s financial difficulties, a company effectively has carte blanche as to the detail.
The imposition of an RP on a class of dissenting creditors is known as a “cross-class cram-down”. Effectively, a cross-class cram-down allows the RP to obtain the court’s sanction without the relevant class of creditors’ agreement, provided that those creditors would be “no worse off” under the RP than they would be in the “relevant alternative”. What circumstances are the “relevant alternative” will be determined by the court, which will consider what would be most likely to happen if the RP was not sanctioned – this could include administration or liquidation, for example.
RPs are increasingly seen as a flexible restructuring tool with huge possible application.
Background: the Landlords’ challenges
New Look CVA
A group of affected landlords challenged the New Look CVA on the grounds that the proposal to force those landlords to accept a turnover rent (instead of the contractual rent set out in the relevant leases) in exchange for extra rights for the landlords to take the premises back to re-let to other occupiers, was fundamentally rewriting the contractual agreements in place and was therefore unfairly prejudicial. Effectively, the landlords argued in their original challenge that a CVA could not be used to impose complex, differential agreements.
The landlords’ claims were rejected by the High Court on 10 May.
The Regis CVA was approved in 2018. Around a year later, in October 2019 Regis went in to administration and the CVA terminated. Nonetheless, a group of landlords pursued their challenge against the nominees, which commenced in November 2019.
The landlords put forward many of the same grounds of challenge as those in the New Look CVA challenge, based on material irregularity and unfair prejudice.
Material irregularity, the landlords claimed, occurred in the way the CVA was approved, because:
- Landlord votes were discounted (which is common in retail CVAs) at the creditors’ meeting which was held to approve the CVA;
- The CVA proposal stated that a total shut down of the company was the alternative to the CVA, whereas the landlords claimed the alternative could have been a sale of the business (or at least part of it) such as may occur in a pre-pack administration;
- Insufficient information was given to the creditors in respect of contracts and transactions entered in to in the years leading to the CVA proposal; and
- Certain creditors ought not have been permitted a vote at the creditors’ meeting as their debts were not valid, and the statement of affairs inaccurately reported the position as a result.
As with the New Look CVA, the landlords also claimed that that CVA was unfairly prejudicial, on the grounds:
- Modifications to future rent were not adequately mitigated by landlord termination rights; and
- Two specific creditors were stated to be “critical creditors” which received deferential treatment (their debts were not compromised) that was not justified.
The landlords in Regis also argued, however, that if the court accepted any of the grounds on which the landlords challenged the CVA, the nominees in charge of the CVA would have breached their duties.
As in New Look, the landlords’ challenge in Regis was largely rejected by the court in its decision on 17 May 2021. The landlords did succeed on one discrete ground of unfair prejudice (relating to what the court indicated was the unjustified classification of one creditor as a “critical creditor”, resulting in unfairly preferential treatment), and the CVA was revoked accordingly. The revocation of the Regis CVA made little difference in practice, however, given the CVA had already terminated in 2019 and the tenant is in administration.
Virgin Active Restructuring Plan
Virgin Active proposed 3 RPs in respect of various liabilities of the company. The landlords’ challenged the RP concerning lease liabilities, on the grounds that it wrote off existing rent arrears and debts owed to the landlords, and reduced future rent payable by the company, making it disproportionately unfair to landlords.
Despite the landlords’ challenge, and the fact that not all classes of creditor achieved the required 75% (by value) creditor approval, the Virgin Active RP was sanctioned by the court. It therefore became the first RP that includes a cross-class cram-down (i.e. an imposition on the dissenting landlord creditors of the RP) to obtain the court’s sanction.
The decision in the Virgin Active RP case sets a worrying precedent for the wider potential use of RPs in future.
Where do these decisions leave landlords?
These decisions will not be welcomed by landlords, who may feel that the courts are prioritising the continuance of struggling businesses over the viability of the landlords’ own. There is also a feeling that the approval of these CVAs and RPs allows investors to wriggle out of obligations when it suits, without any realistic option for landlords – who are almost always a seriously impacted class of creditor – to challenge them. Bearing in mind that those investors are often pension funds and local authorities, the impact of the loss of value of landlords’ assets impacts all of us.
Landlords have already borne the brunt of the pandemic in some respects, in that tenants have been able to choose not to pay rent (despite being are legally obliged to do so), without fear of their leases being terminated or winding-up petitions being issued.
The recent decision in Commerz Real Investmentgesellschaft v TFS Stores  EWHC 863 confirmed that landlords are entitled to sue for the rent due under leases, notwithstanding the Government’s code of practice during the pandemic or the other restrictions placed on landlords. That decision was welcomed by landlords, but it now seems likely that we will simply see more occupiers proposing CVAs and RPs in order to compromise landlord claims for historic and future rents, which the landlords may have difficulty challenging – especially in the case of RPs.
The forfeiture ban is currently expected to end on 30 June 2021. Whether landlords wish to forfeit leases, where there is limited demand for them, remains to be seen.
Landlords have been hit hard by the pandemic and have received limited assistance, whilst being expected to make concessions to their tenants. Those circumstances, and the continued reduction in the value of the landlords’ assets, cannot continue indefinitely.
A glimmer of hope?
Aside from the one pandemic rent decision which went landlords’ way, there is not much for landlords to feel positive about as matters stand. However, the landlords in the New Look CVA have been given permission to appeal the decision on 5 grounds:
- whether the scope of a CVA can, as a matter of jurisdiction, impose different deals with different groups of creditors;
- whether there was insufficient give and take in the CVA between New Look and the various sets of creditors;
- whether it is inherently unfair where the statutory majority of 75% of creditors that is required to approve a CVA is achieved with the votes of unaffected creditors;
- whether reductions in future rent payable are inherently unfair on landlords where the company remains in occupation; and
- whether the additional rights granted to the compromised landlords by the proposed CVA (to terminate the leases early and take back possession of the relevant premises) sufficiently mitigate any unfairness.
As the grounds cited by landlords in the Regis CVA case were similar, that decision may also be appealed, so watch this space. However, it seems that business recovery – whether by CVAs or RPs – is likely to take priority over the landlord’s interests for the foreseeable.
What can landlords do?
Landlords who receive notice of a proposed CVA or RP should:
- ensure they understand how the proposal applies to them and their property;
- engage with the tenants, as it is possible to have an impact on the proposals;
- seek early professional advice as to its possible impact on them and, more importantly, whether there are possible grounds for challenge.
Landlords would do well to ensure they are adequately represented at any creditors’ meetings, and exercise their votes fully.
This article was first published in CoStar