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Landlord’s right to forfeit cannot be varied out of existence by Tenant’s CVA

Ian Whitehead

Company Voluntary Arrangements (“CVAs”) have been attracting headlines in recent years, particularly where they appear to have allowed retail and restaurant tenants to significantly reduce their property liabilities at the expense of some of their landlords.

In Discovery (Northampton) Limited and others v Debenhams Retail Limited and others [2019], six landlord companies sought to challenge the Debenhams CVA, which had been approved by the vast majority of Debenhams creditors, on a number of grounds. The High Court rejected most of the applicant’s arguments, however Mr Justice Norris was convinced by the landlords’ challenge to the variation under the terms of the CVA of the right to forfeit the relevant leases.


CVAs were introduced under the Insolvency Act 1986 with the intention that they should provide a highly flexible insolvency process. They allow debts and liabilities to be restructured so that the company can keep on trading for the overall benefit of the company’s creditors as a whole.

CVA proposals often provide for rent reductions, rent to be paid monthly (rather than quarterly) and facilitate the closure of unprofitable stores or restaurants. In a challenging retail market and with casual dining on the decline, it is not difficult to see why tenants might be attracted to the CVA route as a way of dealing with unsustainable property costs.

In order to bind the company’s creditors, 75% of creditors need to vote in favour of the CVA proposal at a meeting of the company and its creditors.

Proposals sometimes include wording which prevents landlords from exercising any rights to forfeit leases as a result of the CVA itself. It is not unusual for commercial leases to include wording which allows the landlord to take forfeiture action upon the occurrence of a defined “insolvency event”, which will usually include a CVA.

The Debenhams CVA

Debenham’s CVA proposal was approved by almost 95% of its creditors and by over 80% by value, comfortably over the 75% threshold for the approval of a CVA. The six Discovery landlords did not vote in favour of the CVA and, with the backing of an indemnity for adverse costs from Mike Ashley’s Sports Direct, applied to set aside the CVA. Section 6(1) of the Insolvency Act 1986 allows creditors to apply to the Court to challenge a CVA where there is either unfair prejudice to the interests of creditors or some material irregularity with the CVA procedure.

The landlords’ identified a number of grounds upon which they wished to challenge the Debenhams CVA, including arguing that landlords are not really “creditors” in the traditional sense (which would meant that CVAs would not be binding upon them) and also that the treatment of landlords under the CVA was unfair. The High Court determined that the landlords had failed on those grounds.

The ground that the landlords did succeed on was that removing the right to forfeit a lease which would arise as a result of the CVA (or any CVA related event) interferes with a landlord’s proprietary rights, going beyond the jurisdiction conferred on CVAs by the Insolvency Act 1986.

Forfeiture in the CVA context

Whilst the Debenham’s CVA proposal sought to prevent landlords from exercising any rights to forfeiture triggered by the CVA, the High Court has indicated that landlords will not be bound by such provisions. A CVA cannot vary a right of re-entry, although it can modify covenants which require payment or expenditure of money which might lead to right of re-entry being exercised.

Although commercially forfeiture rights are security for the performance of lease obligations, Mr Justice Norris disagreed that their nature was really one of security. Instead, a right to forfeit is a right annexed to the reversion (the landlord’s interest) and not annexed to the term of years demised to the tenant under the lease.  He said that in “seeking to prevent the Applicants from forfeiting because of the entry of the CVA or the occurrence of another CVA-related event the Debenhams’ CVA purports to do what cannot be done under s1(1) [of the Insolvency Act 1986]”.

This decision should provide landlords with some comfort that faced if with a potential CVA it should not be possible for tenants to fetter their right to bring the lease to an end as a consequence of the CVA itself. Depending upon how the forfeiture provisions have been drafted, there may be several triggers as part of the procedural steps to approve the CVA which might allow the landlord to forfeit should they fear an unsatisfactory outcome of the CVA.

Particularly with assets such as large department stores, ultimately it may be better to accept a much reduced rent under a CVA proposal than take back possession if the landlord will then be faced with great difficulty in re-letting and also rates liability.

Landlords should still be very proactive in terms of seeking advice when faced with rumours of a potential tenant CVA and upon receiving any such proposals. It may be necessary to quickly ascertain what CVA-related events under the particular wording of their leases will give rise to the right to forfeit and, as with all potential forfeiture action, great care must be taken to ensure that the right to forfeit is not inadvertently lost by waiver through the landlord’s correspondence or conduct.

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