Collapsed retail chain British Home Stores will have to repay rental discounts it agreed with its landlords, following a High Court ruling.
Prudential, landlord of two former BHS stores in Chester and Southend, won a ruling that the 25% discount in rent agreed as part of BHS’s company voluntary arrangement with creditors in 2016 should be repaid following the chain’s liquidation. And the High Court ruled that the sums are payable as an administration expense, in priority to other debts.
The decision will also apply to other BHS landlords who agreed rental discounts as part of the CVA, some of which lowered the price payable by as much as 75%.
Under the terms of the CVA, BHS agreed that, if it was terminated, the rent discounts would be treated as if they never happened, and the full rents would have to be paid. As a result of BHS ultimately entering liquidation, the CVA was terminated.
This, the judge said, had “substantially increased” BHS’s liabilities to Prudential after the commencement of the liquidation.
BHS’s liquidators sought directions from the high court on whether the chain is obliged to honour the agreement to pay the full sums, dating back to the date of approval of the CVA. They argued that the termination provision in the CVA amounted to an unenforceable contractual penalty.
However, the judge rejected the liquidators’ case and ruled in favour of Prudential. He found that the rule against penalties should not apply to CVAs.
Deputy judge Christopher Pymont QC said that the 2016 CVA provided for some of BHS’s landlords to receive less than the full amount of the rent falling due under leases granted to the company, with landlords of “category “A” stores (including Prudential) to receive 75%; landlords of “category 2B” stores to receive 50%; and landlords of so-called “category 3” stores to receive only 20% of the rent payable, plus a further 5% in lieu of dilapidations.
But he said that it was “impossible to apply the law as to penalties, which is not designed to apply to hypothetical contracts of this kind”.
He added: “It is equally impossible to see how a proposal put forward by or on behalf of the company in the interests of itself, its members and creditors, approved by a statutory procedure and having effect by the statutory hypothesis, can somehow be said subsequently to have oppressed the company in some respect.”
