Landlords of New Look stores have failed in their challenge to a CVA which wrote off rent arrears and imposed turnover rents on hundreds of stores.
Like so many high street fashion retailers New Look was already in a precarious position before the pandemic hit. When its turnover was reduced to nil overnight it projected it would run out of cash without help.
New Look proposed its second CVA in two years to restructure the business. The terms of the CVA would write off rent arrears and switch future rents to a turnover basis over a three year period. See our November update on the CVA here.
When the CVA was approved by the company’s creditors a group of landlords joined forces to lodge a challenge on grounds of material irregularity, unfair prejudice and on jurisdictional grounds (that the arrangement didn’t qualify as a CVA under Insolvency legislation). A High Court judge has ruled in favour of the high street chain and rejected the landlords’ arguments on all grounds leaving the CVA unscathed.
The landlords advanced the position that the CVA was unfair because it put landlords in a worse position than the chain’s other creditors (such as its suppliers) who would get paid in full. The judge was unpersuaded that the differing treatment of alternate types of creditor was automatically unfair.
The landlords challenged the way the voting share for creditors was calculated claiming that the landlords’ share of the vote was unfairly reduced and didn’t take proper account of the break premiums and dilapidations claims which landlords would be entitled to.
In determining voting share for a CVA, claims for unliquidated or unascertained amounts can be valued at as little as £1 or an "estimated minimum value for voting purposes" if the CVA manager chooses to apply one. The landlords argued that the methodology adopted meant their share of the voting rights didn’t reflect what was truly at stake for them in the CVA. The judge didn’t find the reduction in unascertained liabilities amounted to a material irregularity or unfairness in this case. The number and range of uncertainties involved in identifying an appropriate discount for unliquidated and unascertained amounts meant any irregularity was not material.
The judge was also unpersuaded the terms imposed on the landlords were unfair. Although the CVA rents were lower than the rents payable under the lease, the CVA introduced break options for landlords so they could terminate the leases and "get off the bus" if they really didn’t like the new lease terms imposed on them and seek new tenants.
The decision confirms that CVAs are a flexible tool to restructure and the fact they might treat some creditors differently to others will not automatically give rise to a challenge on grounds of unfairness. However, some landlords will be disappointed by the result which will be seen as a green light to retailers and other businesses looking for avenues to restructure lease liabilities. The pandemic has presented many landlords with serious financial challenges, and increased pressure from a rent roll weighted down by tenants in CVAs will not be sustainable in the long term. Landlords have been campaigning for changes to the statutory regime to limit the applicability of CVAs and the decision will doubtless embolden those efforts.
A further decision by the same judge on a challenge to the Regis CVA which was launched by the same landlords is expected shortly.
NOTE: The Landlords in this case have been granted permission to appeal the judgment so their challenge to the CVA will be revisited by the Court of Appeal.