A recent decision in the High Court has important implications for landlords and Insolvency Practitioners (IPs) in the event of a failed CVA. Ben Cowgill of Cowgill Holloway Business Recovery team explains further.
In March 2016 BHS entered into a CVA. One of the main purposes of the CVA was to reduce the rental outgoings for BHS and whilst the affected landlords agreed to the rent concessions they insisted on a rent reinstatement clause bringing the rent back up to its full level with retrospective effect in the event that the CVA failed.
The CVA did fail and BHS went into administration followed by a creditors’ voluntary liquidation.
The landlords subsequently claimed the full rent for the period of the administration as an expense of the administration – relying on the rent reinstatement clause. The liquidators challenged the application of the clause. They argued that it was an unenforceable penalty clause because the detriment on BHS was wholly out of proportion to the legitimate interests of the landlords.
The court disagreed with the liquidators. It was decided that the clause reinstating the full rent was not a penalty clause as the agreement to reinstate the rent on failure of the CVA was part of the commercial proposal agreed with the landlords and was it not deemed exorbitant.
This decision will be welcomed by landlords where a CVA has failed and will undoubtedly embolden landlords to push for a full rent reinstatement clause in any CVA which is put to them.
IPs must be aware that the expenses of the administration will not necessarily be limited to the actual rents payable under the terms of the CVA, but could also include the full rent before any reduction as this decision has proved.
Ben says ‘If a CVA fails, it’s essential to consider any rental discounts. The recent BHS case allowed the landlords to claim full rental after the failure of the CVA due to the existence of a clause – despite a discount being agreed in the CVA.
‘IPs should see this as a warning. When rental expense discounts are agreed during a CVA – check for clauses. In the recent BHS case, a clause existed in the agreement to discard any rent reductions in the event of the failure of the CVA. Therefore, when the CVA failed, the landlord was entitled to the full amount, not just the discounted amount!’
For further advice please contact Ben Cowgill on 01204 414243 or complete the contact us form below.
This article is for general guidance only. It provides an outline, and may not include points which are important to your situation. You should not depend on this blog without taking advice based on the full facts of your case. The information given was correct at the time of publication.