On 10 May 2021, the English High Court rejected landlords’ challenge to the company voluntary arrangement (CVA) of fashion retailer, New Look. The New Look decision was the first in a trio of highly significant judgments focused on a distressed tenant's ability to compromise landlord's claims (our coverage of the Virgin Active decision is available below).

The challenge

The landlords' challenge focused on jurisdiction, unfair prejudice and material irregularity as a result of the following:

• the alleged lack of "give" under the CVA
• the differential treatment of creditors
• the voting calculation for landlord claims (which included a 25% discount)
• the landlords (as mostly impaired creditors) were outvoted by those whose claims were not impaired including secured noteholders who were able to vote for their unsecured shortfall. 

Key takeaways from the decision

The court dismissed the landlords' challenge as follows:

Jurisdiction challenge

Where a CVA proposal provides for a greater return than the relevant 'vertical comparator' (in this case administration), there is enough "give". CVAs can, in principle and depending on all the circumstances, treat creditors differently and can reduce rents to below market rent. 

Material irregularity

Applying a discount to landlords' future claims for voting purposes is permitted given they are unliquidated amounts and the starting point for such claims is £1. The discount of 25% applied to every landlord was justified here and there was no material irregularity.

Unfair prejudice 

It was key that the break rights granted to landlords allowed them to extract themselves from the terms imposed by the CVA if they considered them unfair. The amounts paid to landlords on the exercise of their break right must, however, reflect at least what the landlord would receive in the comparator scenario (administration). 

The noteholders' claims (which secured the 75% majority) had been impaired by the wider restructuring because they had exchanged their secured debt for 20% of the equity in the company. 

Final thoughts

The judgment in New Look has validated market practice and will no doubt reinvigorate the use of CVAs for distressed companies with significant leasehold portfolios. The Regis judgment which followed also dismissed the landlords' challenges to the structure of landlord only CVAs. 

The battle may not be over yet, however. The landlords in New Look have been granted permission to appeal on all the points.

Find out more

To discuss the issues raised in this article in more detail, please reach out to a member of our Restructuring & Insolvency team.