A Business In Difficulty Can Terminate Its Property Leases And Be Fair To Landlords

CVAs in the retail sector use a successful model first proposed by the retailer JJB, which in 2009 successfully proposed a CVA designed to save 250 stores and 12,000 jobs.

The proposal included closing 140 unprofitable stores but made available a fund of £10 million for the landlord creditors of these premises, equating to payment of rent of approximately six months.

JJB also made a significant compromise in bearing the substantial costs of the business rates of the unprofitable stores. The landlords of the open stores were offered the passing rent on a monthly basis for a period, after which the standard contractual quarterly payments would be reinstated.

No leases were 'torn up' by the CVA and it was left to individual landlords to decide whether they wished to accept a surrender, consent to an assignment or forfeit the lease.

The landlords as a group recognised that there was a substantial risk that JJB would go into administration, which would have meant that they received no payments of rent or business rates for the closed stores. They welcomed and appreciated being consulted in a transparent proces and being offered a genuine compromsie.

It is often the case that the core of a struggling business is viable and if it can be restructured to focus on the parts that are profitable it need not go into administration.

This can benefit creditors too, because they will then see some return on what is owed to them as the above example illustrates. In many cases the creditors will include landlords who own the property or properties from which the business is trading.

While the landlords' rights for dealing with arrears are included in the lease they usually include both the right to seize assets from premises to cover arrears or the right to forfeit the lease and claim loss due to breach of contract.

The forced termination of a lease can only be done by a liquidator following a company's liquidation. If a company goes into administration and is sold the Administrator can also force termination of those leases no longer required.

However, in the JJB illustration above, negotiation with the landlords to terminate some leases was made possible by proving to them how much they would receive in the event of a liquidation and showing that the alternative offer set up using a Company Voluntary Arrangement (CVA) was better than liquidation.

Crystallising lease liabilities and including landlord(s) as creditors is another way of using a CVA, although this ony really works with vacant premises.

It is extremely difficult to force a change in the terms of a lease and the courts will wish to test whether a landlord has been treated fairly or not as a creditor in a CVA, regarded as vertical and horizontal tests.

The vertical test considers whether or not a landlord's outcome is better or worse that would have been achieved in liquidation and may require expert opinion.

In the horizontal test the landlord as a creditor is compared with other creditors and where creditors can vote but are excluded if a CVA is approved, then the Court would consider creditors by class as would then be applied in a Scheme of Arrangement under Part 26 of the Companies Act 2006 (formerly s425 of the Companies Act 1985).

While, logically, lease termination might be handled by a lawyer, it can help to have assistance from business rescue advisers or insolvency practitioners who can carry out a business revue and produce a comparison of outcomes to show the outcome for landlords in the event of liquidation to help justify their accepting an offer that avoids liquidation.


Copyright (c) 2010 Alison Withers