Landlords fear more CVAs after failed New Look legal challenge

The industry fears a “world of hurt” for landlords, including more retail restructurings, after the High Court upheld retail chain New Look’s controversial company voluntary arrangement, under which landlords of more than 400 stores will receive turnover rent. In their legal challenge, affected landlords argued that New Look’s proposed switch to a turnover-based system “fundamentally rewrites” leasing agreements in a way that has never been done before and was “unfair”. However, High Court judge Justice Zacaroli rejected these claims earlier today, finding that the landlords had not been unfairly prejudiced by the terms of the CVA. A spokesman for Landsec, one of the landlords that challenged the CVA, said: “Naturally, we are disappointed with the decision from the High Court. Legal action is always a last resort. “In challenging New Look’s CVA our intention was to get certainty as to how and when CVAs should be used, particularly in the context of a wider complex restructuring, where only a subset of creditors are impacted. Ultimately, our aim was to ensure the future framework for CVAs allows for a collaborative, transparent approach. “We believe this outcome only increases the likelihood of future CVAs, and potentially other restructuring tools being run with insufficient consultation and transparency with key creditor groups.” He added that Landsec always strives to find the best solution for both landlord and tenants, as demonstrated by its £80m customer support fund and work on devising solutions to the moratorium on enforcement action and accrued arrears with other industry bodies. British Land, another landlord involved in the proceedings, said it is “digesting the judgment and considering [its] next steps”. A ‘bruising’ outcome Katherine Campbell, head of real estate disputes at Reed Smith, said the decision was “sadly unsurprising” and that “to say the outcome is bruising” might be an “understatement”. The judge’s ruling against the landlords’ argument will “only see landlords confirmed as the piggybanks of the slowly recovering retail sector”, according to Campbell. Campbell said: “Setting the precedent of a turnover-based rent system let the genie out of the bottle, and there likely won’t be any success now in putting the stopper back in. In the last seismic CVA challenge to go before the courts, Debenham’s CVA challenge last year, the judge set the bottom line for rent reduction at ‘market rent’, but in the New Look CVA challenge resolved today, embattled landlords asked for a ‘bare minimum rent’ and even this fell on deaf ears.” She added: “Landlords had been hoping for an eleventh-hour reprieve, and as the unpaid rent bill soars, we may be in for a reckoning. We must not forget that the pandemic turmoil has affected more than just retail and hospitality outlets – many of their landlords are struggling to stay above water, too. “With the Virgin Active restructuring plan in hearings this week also threatening to redraw the lines of engagements between businesses and creditors, tenants and landlords, we urgently need to rebalance the scales, or risk inviting a world of hurt in coming months as landlords shoulder increasingly heavy cashflow issues. “In the battle between landlords and retailers, the current winds are blowing up a storm.” Clive Chalkley, head of property litigation at Gowling WLG, said: “In the New Look case, the court had the opportunity to restrict the scope of CVAs, but chose not to do so. “What is clear is that tenants will, as they have to date, continue to push the envelope of what is achievable via CVAs. Landlords will need to keep a careful on eye on these developments and be willing to challenge any abuse of this process.” A ray of hope However, landlords may be able to gain some hope that the challenge has shone a spotlight on the likelihood of being outvoted by large groups of creditors that would not feel any impact from a CVA. The British Property Federation highlighted a passage in the judgment, in which the judge noted there would be “strong grounds to conclude it was unfairly prejudicial where a CVA, which compromises the claims of a sub-group of creditors, is achieved only because of the votes of a large swathe of creditors who are unaffected by the CVA, even if there was an objective justification for those creditors being unaffected by the CVA”. Melanie Leech, chief executive of the BPF said: “While the High Court challenge to New Look’s CVA was unsuccessful, the judge has sent out a clear message for the future – ‘landlord CVAs’ are unfair, where a CVA asks one sub-group of creditors to absorb significant pain, yet the CVA is approved by a swathe of unaffected creditors. “Continual challenges show that CVAs frequently result in unfair outcomes, and the government must act to make sure insolvency legislation is made fit for purpose and fair to all affected parties.” To send feedback, e-mail pui-guan.man@egi.co.uk or tweet @PuiGuanM or @estatesgazette To send feedback, e-mail jess.harrold@egi.co.uk or tweet @estatesgazette Image © Jack Dredd/REX/Shutterstock