BHS collapse: win for landlords as CVA terms held not to have permanently varied leases

Facts

The applicants were the joint liquidators of SHB Realisations Ltd, formerly BHS Limited (the “Company”). Prudential Assurance Company Ltd (“Prudential”) was landlord of two of the Company’s properties.

The Company entered a company voluntary arrangement ("CVA") in March 2016. The Company entered administration in April 2016 and then creditors' voluntary liquidation in November 2016. The CVA was terminated in December 2016 following the non-payment of sums due to landlord creditors.

Upon termination of the CVA, clause 25.9 took effect which stated that upon termination "the compromises and releases effected under the terms of the CVA shall be deemed never to have happened" and the creditors would have the claims against the Company that they would have had if the CVA was never approved.

Judgment

Prudential contended that they were owed the full amount of outstanding rent as would be due under the original lease and the balance was payable as an administration expense.

The Applicant resisted this on two grounds:

• Clause 25.9 should be struck out as a penalty.Whilst the Courts accepted that a CVA does take effect as a contract, it was held that CVA’s do not have every attribute of a contract and operate as a "hypothetical" contract so penalty clauses cannot apply.
• Paying the full amount of rent due under clause 25.9 would contravene the pari passu rule because it would have the effect of proportionately increasing the claims of Prudential.The Court rejected this on the basis that the CVA did not vary the Company's liabilities so clause 25.9 could not create a new liability. The CVA created a "rent concession period". Termination of the CVA brought the "rent concession period" to an end and Prudential had returned to its original position under the lease.

Upon deciding Prudential was owed the amounts due under the original lease, the Court determined that these sums were payable as an administration expense, even though the full rent was a contingent liability during the CVA.

Takeaway

CVAs do not operate as contracts in a true sense and do not therefore permanently vary the terms of the original lease. If an insolvent company wishes to pay reduced rent should the CVA fail, they should include words to this effect in the terms of the CVA.

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