New Look - Seems Quite Similar to Me

On 10 May Mr Justice Zacaroli handed down judgment in the case of New Look Retailers Limited [2021] EWHC 1209 (Ch).

This case is the first of a three part trilogy (the Regis CVA challenge and the Virgin Active Restructuring Plan sanction being the subsequent two parts) where the issue of landlord and tenant dispute over arrears and future rent takes centre stage.

New Look contains a challenge to a CVA approved by 82% of the creditors by a group of 4 Landlords on grounds of (1) jurisdiction – the proposal or aspects of it did not constitute a composition or arrangement as per Section 1(1) IA 1986 (2) unfair prejudice and (3) material irregularity.

The challenge was described as a 'root and branch attack on the use of CVA's' and was rejected on all grounds.

Background

The New Look CVA like many other 'retail' CVA sought to define sub-groups of unsecured creditors and outline how each sub-group would be treated. Landlords were divided into 3 groups – A (2 Landlords generally unimpaired save rent changed from quarterly to monthly (B) rent arrears released save ability to take part in a 600K fund and change to turnover rent for 3 years, both Landlord and Tenant given various rights to terminate (C) rent arrears released save ability to take part in a 600K fund and after 2 months payment of rent, service charge and insurance, rent reduced to nil with both Landlord and Tenant given various rights to terminate.

Two-fifths of the Landlord subclasses B&C voted against the CVA but were diluted by the other creditors including senior secured note (SSN) holders; where the value break on the insolvency of New Look would have made them unsecured. These SSN's holders whose vote was essential in achieving the 75% statutory majority, would in exchange receive a minority equity stake in the parent company pursuant to the terms of a scheme of arrangement, a condition of which was the successful approval of the CVA.

The Challenge

The most interesting challenge was that the proposal was not a composition with the company's creditors, but was in fact a separate arrangement with different groups of creditors and thus outside the scope and intention of the Insolvency Act CVA scheme. In addition to this it was contended that the granting of rights to New Look to terminate was an interference with a property right. This latter argument deriving from the Debenhams challenge of last year, where it was held that a Landlords proprietary rights (in that case a right to forfeit for breach of lease) could not be compromised).

In a careful judgment which looked at the pre-1986 position, the introduction of the CVA and case law development – the Court saw that the differing treatment of creditors as being a reason for inquiry but was not fatal on grounds of jurisdiction or unfair prejudice. The differing treatment could well be justifiable. The fact that the statutory majority (75%) was achieved by votes of creditors who were either unimpaired or who would receive substantially different treatment from the sub-group of landlords was similarly not by itself sufficient reason to set aside the CVA.

As in the Debenhams case the ability for the Landlord to terminate and 'get off the bus' was seen to eliminate potential unfairness to the Landlord. Also important in fairness was the Company's argument that the replacement rent represented better than market rent. It should be noted that the Court held that there was not a rigid test i.e. if market rent was not offered it was automatically unfairly prejudicial. As a result the fact that for Class C rent was reduce in time to zero (and thus below market rate) was mitigated by the accompanying right of termination.

The Judge twice made the observation that the tenants inability to pay future rent was not caused by the CVA but by its insolvency. The Landlords would receive less in an alternative liquidation process and attempts to argue that in an administration or scheme of arrangement the Landlords would be in a better bargaining position were viewed as speculative.

In regards to the failure to set out in the CVA the 'benefits' to the SSN holders of a successful scheme, this was not seen as a materially irregularity, neither was the 25% discount on Landlords claims for voting purposes. The estimation of such claims being recognised as 'not an exact science.'

Conclusion

During Covid many Landlord have become highly vocal at the 'mis-use' of the CVA procedure; that they as a creditors class are being singled out and paying for restructuring of a tenant company by the compromise of future rent. That tenants are able to re-write the terms of occupation via the use of the voting power of unimpaired creditors is viewed as an abuse of process that was never intended to have such far reaching effects.

Blunt though the CVA tool is, it use for retail tenants is of course a reflection of the market conditions; the alternative for the tenant company and its creditors as a whole is fair worse. Why the debate is so enraging to Landlords is that in current market they seldom want the premises back and thus the 'fairness' afforded by the right of termination is of little comfort.

The Judgment is a set back for Landlords who may well see tenants returning in numbers to the use of the CVA as a means by which the problem of rent arrears (estimated at circa £6bn) and over-rented properties can be dealt with. In some ways therefore the judgment represents a continuation of the tenants ability to restructure its occupational portfolio, including an ability to renegotiate the terms of leases, by use of the CVA process.

Judgment is also awaited on the case the Regis CVA challenge and the Virgin Active Restructuring Plan. In the later case the court will determine whether the dissenting Landlord class of creditors can be 'crammed down' where other economically impacted classes vote in favour. A further failure for Landlords is likely to significantly alter the landlord and tenant landscape.