Landlords who enter into company voluntary agreements ('CVA') with their tenants, agreeing to accept a reduced rent, can recover the full rent in the event that their tenant subsequently enters into liquidation, so long as the terms of the CVA allow this.
In a recent case, British Home Stores ('BHS') entered into a CVA with some of its landlords, agreeing reduced rents for a number of its leases. The CVA included provisions that if it was terminated the landlords would be entitled to recover the full rent under those leases, including for the period that the CVA was in force.
The CVA was ultimately terminated and one of the landlords, The Prudential Assurance Company Limited ('Prudential'), demanded the full rents. The liquidators argued that the requirement to pay the additional sums (being the difference between the reduced rent due under the CVA and the full rent due under the leases) was a penalty and therefore not enforceable and that the additional sums were not an administrative expense.
The High Court ruled that a right to recover the full rent due under a lease is not a penalty and that it is not exorbitant, extravagant or unconscionable for the parties to a CVA to be returned to their pre-CVA position upon termination of the CVA. It also ruled that the CVA was not a deed and so did not vary the terms of the leases, so that the full rent was payable under the leases. The Court also held that the additional sums were an administrative expense, taking priority over other unsecured debts.
This is a positive ruling for Landlords who agree to accept a reduced rent during a CVA, although care should be taken to ensure that their right to recover the full rent, should the CVA fail, is properly documented in the terms of the CVA.