What landlords can learn from the collapse of BHS
21 May 2018
Local and national press have recently publicised a number of high profile Company Voluntary Arrangements and speculated there will be more coming down the line in the retail sector. High street brands such as BHS, New Look and Carpetright have all entered CVAs. BHS entered liquidation (as SHB Realisations LTD) and we’re told that House of Fraser and Mothercare are also under pressure, facing difficult negotiations with landlords.
Each interested party will come with its own particular view on the situation when the retailer proposes or enters into the CVA. For the retailer, they will see it as the only viable option to avoid insolvency. They will see that they are offering their creditors, including their landlord, not only an alternative to liquidation, but in fact a financially better alternative.
That may well appear correct on raw figures but the landlord will no doubt feel that they are having their “face washed”, with the tenant potentially writing historic debt down to pence in the pound and trading out the other side, potentially on more preferential terms. The landlord may well also have little say in the outcome of the CVA since they do not hold the requisite 26 per cent by value of debt to allow them to vote the proposal down.
The insolvency practitioner will attempt to illustrate that the arrangement is a better alternative for both parties. They will see the obvious benefit to the otherwise insolvent retailer and can see that whilst the landlord may have taken a hit on historic debt, they are doing better than they would on insolvency. The landlord avoids having a vacant unit and with added hope that the business can be turned around.
The recent case of SHB Realisations Limited (formerly BHS ltd) provides clarity for all three of the parties mentioned above as regards what they might expect out of a CVA.
BHS proposed a CVA to avoid being placed into immediate liquidation. The major creditors were landlords and as a result of the approved CVA, many saw their rent slashed by over 50 per cent.A clause in the CVA however stated “compromises and releases effected under the terms of the CVA shall be deemed never to have happened, such that all landlords and other compromised CVA creditors shall have claims against BHS Limited that they would have had if the CVA proposal had never been approved”.
Soon after approval of the CVA, BHS went into administration followed by liquidation in November 2016 and the CVA was terminated a month later.
The Prudential Assurance Company was one of the affected landlords. They argued the liquidator owed all outstanding rents in full and not the CVA compromised amount. They also argued that for the period of the administration, this greater amount was due to be paid by the Administrator as an expense of the administration. The Liquidator was therefore forced to approach the court seeking clarification. on three fronts.
The Court held that the clause was not a penalty clause. It simply reinstated the landlord’s right to full rent. The CVA was negotiated and was proposed in the interests of the tenant. It is interesting it was held that the reduction of rent provided for was not a variation of a lease. Any variation was held to have to take place by deed. The CVA was not a deed of variation.
The Court held that the relevant clause did not breach the “Pari Passu” principle since the reasoning in the CVA was simply to ensure that landlords would not be disadvantaged if the CVA was terminated. The reduced rent only continued when the CVA was in force.
It was also held that his full rent now due was properly payable as an expense of the administration, it was always a contingent liability whilst the CVA continued. The Court thus made it clear that for any period during which he administrators used leasehold premises, they were liable to pay as an expense.
This case highlights the importance of legal advice when a tenant proposes or enters a CVA. If a landlord is not happy with the proposals put forward, the only way to challenge a CVA is through the Court and within 21 days of the CVA being approved.
A CVA is a useful tool that must be considered in any potential insolvency situation. Whilst the BHS CVA did not end well for this retailer, we have seen recent examples of retailers getting a second chance by successfully implementing and working through a CVA.
What is clear in the current retail market is that we have not witnessed the last high profile retailer proposing a CVA nor landlord having a difficult decision to make.