Effective 1 June, we have a new address: 34 Imperial Square, Cheltenham, Gloucestershire GL50 1QZ
Get in Touch Menu

CVAs and landlords’ rights

09 July 2007

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.

Contact us

Alasdair Garbutt LLB (Hons)
View profile
Alasdair Garbutt
Related services
Share this article
Resources to help

Related articles

The Charities Act 2022

Real estate

After key changes to the law were proposed in May 2021, the new act received Royal Assent on 24 February 2022, and was passed into law as the Charities Act…

Charlotte Brunsdon LLB, BA (Hons)
Associate, solicitor

Regulation changes to see rise in energy efficiency standards

Real estate

From 1 April 2023, the Minimum Energy Efficiency Standards (MEES) regulations are set to become even stricter for commercial properties. The regulations were introduced in 2015 to target the least…

Charlotte Brunsdon LLB, BA (Hons)
Associate, solicitor

Webinar: Spring commercial property law update

Litigation & dispute resolution

In this Spring update our experienced partners in commercial property and property litigation will share insight on several topics. The first is a look at development land and will include…

Contact us