In light of the radically and rapidly changing face of bricks and mortar retail, cases providing guidance on the way in which liabilities are to be dealt with in the course of the restructuring / insolvency process are extremely valuable not only for stakeholders and practitioners dealing with the consequences of those processes but also to those guiding and devising the strategies in the first instance.

Wright and Rowley v Prudential Assurance Company Limited is one such case arising out of the collapse of the British Home Stores (‘BHS’) retailing group in 2016.

Carpetright, the UK flooring company, has announced that it is considering a Company Voluntary Arrangement with the aim of “rationalising the company’s property portfolio in order to improve the long-term prospects of the business”. This is expected to enable the business to close unprofitable shops and reduce their rent bill. With 409 shops across the country, any proposed CVA is going to have a significant impact on landlords.

A new wave of CVAs?

A company voluntary arrangement (CVA) is, provided the voting thresholds are met, a binding agreement made between a company and its creditors, designed to compromise a company’s obligations to its creditors.

As retailers and restaurateurs across the UK continue to show signs of financial distress, interest in the use of CVAs has increased. A common facet of a CVA is a focus on reducing rents and offloading unprofitable leases.

Compromised or full rent?

The Court of Appeal has held that refusal of consent for both good and bad reasons will not automatically render that refusal unreasonable.

Background

Most commercial leases require tenants to obtain the consent of their landlord prior to assigning their lease. If so, the Landlord and Tenant Act 1988 (the Act) applies to say that if the tenant serves a valid application for consent, the landlord will be subject to the following duties:

Collapsed retailer British Home Stores cannot challenge its own company voluntary arrangement as an unenforceable contractual penalty and must repay rental discounts to its landlords, the High Court in England and Wales decided yesterday.

The case, in which Hogan Lovells represented the successful landlord, provides important guidance on the operation of company voluntary arrangements (CVAs), particularly after termination, and the payment of rent as an expense of a company’s administration in priority to other debts.

CVAs

Tiuta International Ltd (In Liquidation) v De Villiers Surveyors Ltd [2017] UKSC 77

Overview

Summary: In Wright (and another) (as joint liquidators of SHB Realisations Ltd (formerly BHS Ltd) (in liquidation)) v Prudential Assurance Company Ltd, the court held that, when the BHS CVA terminated, the landlord was entitled to claim the full rent due under its lease. With more recent CVAs seeking to push the envelope even further, is the continued compromise of landlord creditors post-CVA the next issue to be tested in the courts?

Judgment was recently handed down in the Court of Appeal case of No 1 West India Quay (Residential) Ltd v East Tower Apartments Ltd [2018] EWCA Civ 250. It is the first reported decision on the application of the Landlord and Tenant Act 1988 in the residential context, but it has implications as much for commercial landlords and tenants, as for residential. The case examined important issues which arose from a long lessee of a flat applying to its landlord for consent to assign.

The Court of Appeal has released an important decision for landlords and tenants concerning applications for consent to assign a lease, overturning the High Court's earlier decision in No.1 West India Quay (Residential) Ltd v East Tower Apartments Ltd.

The Court of Appeal decided that one bad reason for a landlord refusing its consent will not render the entire decision to withhold consent unreasonable, so long as there are other reasons for the refusal which are good and free-standing.

The expression “dilapidations” refers to any breach of lease covenants which relate to the condition of a leased property. This can apply to, among other things, a tenant’s covenants to repair the premises, to decorate or to remove alterations.

The process for ensuring that dilapidations are remedied usually takes place at the end of a lease, and any such dilapidations are commonly labelled “terminal” or “lease end” dilapidations. The procedure for determining liability can be complex and can potentially end up in Court.