CVAs and landlords’ rights

The commercial property market has been keenly awaiting judgment in Prudential Assurance Company Ltd and Luctor Limited and others v PR Powerhouse Ltd.

The concern was that a CVA (company voluntary arrangement) might be used to remove landlords’ rights to guaranteed rental income.

The High Court has now ruled that an attempt by a tenant company to strip away landlord guarantees provided by its parent through the use of a CVA was unfairly prejudicial to the landlords. One of our solicitors briefly examines the case and what it means for landlords.

What is a CVA? A CVA is a compromise or other arrangement with creditors to satisfy a company’s debts.  A proposal is put to creditors at a meeting and, if approved, is binding. A CVA can be  challenged if it unfairly prejudices the interest of a creditor. If the challenge succeeds, the court may revoke or suspend the CVA.

Powerhouse owned a number of high street electrical stores and superstores, some held under leases where the landlords had the benefit of parent company guarantees.

The company got into financial difficulties, informed creditors that they intended to close 35 stores and proposed a CVA. Broadly speaking, the CVA recommended a capped fund from which creditors of the closed stores would receive just 28p in every pound owed to them. All other creditors were to be unaffected by the CVA.

Not surprisingly, the landlords challenged the validity of the CVA and were successful. When comparing the position of the landlords with their fellow creditors, the court said it was obvious that the landlords were unfairly prejudiced and left in a far worse position.

Had Powerhouse gone into insolvent liquidation, the landlords would have had the benefit of the parent guarantees. All the creditors, other than the scheme fund creditors (which included the landlords) were entitled to be paid in full. Effectively, the claims of the landlords were to be discharged from the fund at a fraction of their worth in order that other creditors could be paid in full. The court felt that this result was illogical as well as unfair.

While the decision clarifies that a CVA may not directly release guarantees, it can have the indirect effect of doing so by obliging a creditor to treat the guarantee as though it had been released.

The concern was that, had the decision gone the other way, there could have been a significant impact on the valuation of leasehold property where parent guarantees were used to support tenants’ covenant strength.

Creditors, and in particular landlords, need to scrutinise the terms of a proposed CVA carefully before accepting it to ensure that the CVA offer is a fair compromise for all creditors, not just one category of creditor.

As always, if you need commercial and pragmatic legal advice, we’re here to help so please get in touch.

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