Michael Metliss and Jeremy Stephen highlight some important questions raised by the demise of BHS and what they mean for the future of tenant insolvency and company voluntary arrangements
While the parliamentary Work and Pensions and Business, Innovation and Skills Committee investigates BHS’s demise, a less publicised drama is being played out elsewhere. The various BHS group companies became subject to a company voluntary arrangement (“CVA”) one minute and an administration the next.
The success of the administration was thought to depend on a sale of the business. There was no business sale, and the press anticipated imminent liquidation. The administrators announced instead that the business is being wound down, as opposed to wound up, and the relevant companies will remain in administration to facilitate asset sales. The CVA, they say, remains in force as well.
The difficult issues that have been thrown up by these novel events may or may not be resolved in the context of the BHS insolvency. Either way, they do need to be resolved sooner rather than later.
CVAs
Almost all the major recent retail insolvencies have, to varying degrees, cited high property costs as a partial cause of business failure. It follows that reducing those property costs is an inherent feature of CVAs.
In the retail context, a typical CVA is a compromise agreement between the insolvent company and its landlords, and other unsecured creditors. It offers an insolvent retail chain an opportunity to alter arrangements with all of its landlords in one fell swoop.
By securing rent reductions across its property portfolio, it can buy itself time; the breathing space that the company needs to try to survive as a going concern. The carrot offered to landlords is that the CVA offers them more than an administration. Stores are kept open, rates are paid, and payment of some rent is better than no payment at all.
Because it is a compromise, it comes at a price to the tenant company. So it was decided in the case of Thomas v Ken Thomas Ltd [2006] EWCA Civ 1504; [2007] 1 EGLR 31 that future lease liabilities can only be compromised if dissatisfied landlords can get back their properties.
That bargain was reflected in the BHS CVA. Certain landlords agreed to receive reduced rents. In return, they could terminate leases on 60 days’ notice, and/or procure a lease surrender or assignment.
CVA rights granted to landlords are legally problematic. There are well known statutory requirements for entering into property transactions, and provisions that govern the termination of business tenancies by notice, surrender, or forfeiture. Those requirements/provisions are not always met/satisfied in CVAs. Arguably, therefore, CVA rights granted to landlords are unenforceable. CVAs in the BHS format are nevertheless common. The Bowlplex, Travelodge and Fitness First CVAs have all incorporated similar mechanisms in recent years, without objection.
Insolvency practitioners are mindful of landlords’ concerns. After all, the now historic Powerhouse CVA was overturned by landlords as being unfairly prejudicial to them.
Despite the legal uncertainties as to whether a CVA can effectively compromise/create property rights and obligations, and might unfairly prejudice landlords, the vast majority of BHS landlords voted for the CVA, presumably on the basis that it was preferable to an administration.
Administration
The success of the BHS CVA was dependant on a third-party cash injection. Administrators were appointed when that did not happen.
CVAs are often put in place by administrators as an exit route from administration. There is little or no precedent for a company going into a CVA first. Has the CVA survived the appointment of administrators? The administrators have asserted that it has.
So, having voted for a CVA in order to avoid administration, and the BHS companies now having gone into administration, landlords are currently being paid weekly instead of quarterly, at the rates set out in the failed CVA.
If that is right, can landlords exercise their reciprocal termination rights, as the Thomas judgment envisaged? There is a wall of arguments as to why landlords cannot exercise those rights:
- The ability to serve a 60-day termination notice has not been incorporated into the BHS leases. If it had, the termination would have to be accompanied by a termination notice under the Landlord and Tenant Act 1954 (“the 1954 Act”), giving a minimum of six months’ notice, and presumably opposing renewal on one of the seven statutory grounds.
- If it is a forfeiture notice, it has to comply with section 146 of the Law of Property Act 1925, relying on an actionable breach of the lease.
- The CVA right to procure a surrender offends the anti-avoidance provisions of the 1954 Act.
- No legal action can be taken against a company in administration without the administrator’s consent or the court’s permission.
Outlook cloudy
At its worst for landlords, without any quid pro quo, the CVA’s survival enables the administrators to sidestep the Court of Appeal decision in Jervis and others v Pillar Denton Ltd and others [2014] EWCA Civ 180; [2014] PLSCS 62, that companies in administration must pay their full rent for as long as they beneficially use a property.
In the past, landlords have generally, if reluctantly, voted in favour of CVAs. Unless the legal questions raised here (there may well be others) are resolved satisfactorily, they may be more reluctant to do so in future.
This interplay between property law and insolvency law is, therefore, a curious sideshow to the whole BHS saga.
Michael Metliss is a partner and Jeremy Stephen a senior associate at Berwin Leighton Paisner LLP
