On 10 May 2021, the much-anticipated judgment was handed down in the New Look CVA case. All 330 paragraphs can be found here. This was a challenge to New Look’s proposed CVA brought by various landlords including Lazari Properties 2 Ltd, The Trafford Centre Ltd, LS Bracknell Ltd and others.
In summary, the New Look CVA was upheld and the court found that it was not unfairly prejudicial to landlords. The challenge included issues with the voting at the CVA (creditors whose claims were not compromised were allowed to vote) and with the different treatment of different groups of creditors within the CVA itself. The court’s decision confirms that CVAs must be considered on their own facts, and what looks to be unfairly prejudicial on first blush may nevertheless turn out to be either not unfairly prejudicial or can be justified on the facts.
In this article I look at the key take away points from the case in more detail.
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What do we already know about the position of landlords in CVAs?
We already know that a landlord is a creditor in respect of both outstanding rent and rent falling due in the future. In respect of that future rent claim, this is treated as unliquidated and unascertained (pursuant to the decision in the Doorbar case). This means that for voting purposes, pursuant to Rule 15.31(3), the future rent claim can be valued at £1 unless the chair decides to put a higher value on it. In making that decision, the chair must examine the evidence put forward by the landlord and any other creditor or debtor. If the chair concludes that he can “safely attribute to the claim a minimum value higher than £1 then he should do so” (per the decision in the Newlands case).
Further, a CVA is perfectly able to compromise a future rent claim, as it does other claims. And it is able to do this even where the company remains in possession (as decided in the Debenhams CVA) – albeit that decision was effectively challenged in this case.
The proposed New Look CVA
Next up let us look at the proposed CVA in this case. The creditors were categorised as follows:
Category A: landlords of New Look’s distribution centre – critical to continued operations.
The only notable effect of the CVA on the Category A landlords was that the timing of rent payments was changed from quarterly to monthly.
Category B: landlords of stores where (1) the property costs were above market rate, or (2) moving to a turnover rent was needed to make the stores viable post-COVID.
For the purposes of this article, the main effects of the CVA on the Category B landlords were:
No payment of rent arrears.
Service charge and insurance arrears paid in full.
Future rent payable at a turnover rent payable monthly in arrears for three years.
After three years, rent is paid at the higher of a turnover rent and market rent (until the end of the lease).
Each landlord had the option to terminate the lease on 60 days’ notice:
In the first five months of the CVA.
One year thereafter.
Two years thereafter.
On the day before the third anniversary of the CVA.
A pro rata share of £600,000 was to be set aside to meet claims which a landlord would effectively have on disclaimer by a liquidator.
New Look also gained a termination right by giving 60-90 days’ notice before the end of the CVA, which it could exercise if sales had not returned to 85% of pre-COVID sales.
Category C: landlords of stores already vacated, or which would be vacated because they were not viable.
The main effects of the CVA on the Category C landlords were:
No payment of rent arrears.
Future rent, service charge and insurance payments payable in full for two months.
No entitlement to rent or service charge thereafter.
Future insurance payable where New Look remains in occupation.
Each landlord had the option to terminate the lease on 60 days’ notice at any time.
A pro rata share of the £600,000 disclaimer damages.
New Look had a termination right by giving 60 days’ notice at any time.
On what basis was the CVA challenged?
The challenge was put on three main bases:
The CVA was not actually a CVA (a jurisdictional challenge) because it was tied up with a scheme of arrangement for certain other creditors, and as such was not a single “composition in satisfaction of the company’s” under the Insolvency Act 1986.
The CVA was unfairly prejudicial because:
The majorities needed to approve the CVA were achieved with the votes of creditors whose claims were unimpaired by the CVA.
Creditors whose claims were compromised received differential treatment from those that were not.
The modifications to the leases were unfair.
There were material irregularities:
In valuing the landlords’ claims for voting.
Because of inaccuracies in the proposal.
In this article I am only going to look at the unfair prejudice point, however for completeness the other challenges did not succeed.
The unfair prejudice challenge – the CVA was approved with votes of unimpaired creditors
The court held that that it is not necessarily unfairly prejudicial that the CVA was approved only with the votes of unimpaired creditors. Rather, it will depend on the particular circumstances of each case.
The court took this view largely because the outright outlawing of such a CVA would occur regardless of the voting percentages. For example, the CVA would not be approved where only 20% of the compromised creditors voted in favour, nor where 74.9% of the compromised creditors voted in favour. Clearly in the latter case that would be an unsatisfactory outcome and a more flexible approach is needed.
The unfair prejudice challenge – the CVA treated creditors differently and lease modifications were unfair
On these two aspects, the court focused on vertical and horizontal comparisons:
The vertical comparison is comparing the CVA outcome to the alternative – in this case the outcome in administration. This was readily satisfied in this case: the landlords would be worse off in New Look went into administration.
The horizontal comparison is comparing the position of the landlords in this case with other creditors. The question is not just are the landlords worse off, but in the event that they are it must be established whether this is justifiable.
The following key arguments were considered:
It was unfair that some creditors were unaffected by the CVA, which was obviously a difference in treatment to the landlords.
The court held that it was important to consider the fact that those other creditors were subject to a scheme which involved an exchange of secured debt for a minority equity interest in New Look. That impairing of their rights was to be considered as part of the horizontal comparison even though the impairment was not under the CVA itself.
The landlords did not actually receive a benefit by being able to forfeit as they could do this anyway:
The court found this not to be the case: the existing rights only enabled landlords to terminate for non-payment of reserved rent; and in any event there is presently a moratorium on forfeiture, so landlords could not even utilise this benefit. The CVA therefore did offer them increased termination rights which were not afforded to other groups of creditors.
The category C landlords received rent in full for two months (i.e., to cover them if they gave notice to terminate), whereas the category B landlords received only turnover rent.
The court held that this point was not made out on the facts as there was no expert evidence to say that the turnover rents would be less than market value, and as such the category B landlords may even have been better off that the category C landlords.
The landlords’ claims had been discounted by 25% for voting purposes.
The court held firstly this was a fair discount as it was based on expert evidence as to the likely value, but secondly that in actual fact it had no impact as the discount was applied across all classes of landlord regardless of whether landlords voted in favour of or against the CVA.
The scheme creditors had not had their claims discounted at all.
The court held that this was the norm as their claims were liquidated, and as such distinguishable from the unliquidated claims of landlords.
A CVA must modify leases only insofar as is necessary to achieve the purpose of the CVA.
The court held that this requirement was satisfied in this case – there was no permanent reduction in rent and not even a long-term reduction.
A CVA which reduces future rent while permitting the tenant to remain in possession is inherently unfair.
The court relied on the Debenhams case as authority for that issue being overcome by offering the landlords a right to terminate.
It is unfair for a tenant to be able to trade under a CVA for the benefit of past creditors at the expense of its landlords.
The court held this was not a good comparison as other creditors generally charged prices that reflected current market prices, whereas rents were set at amounts that far exceeded market value in the present day. As such, it was not necessarily unfair for landlords to receive less than the contractual rent.
The key underpinning point in this case was that nothing in the CVA was being forced on the landlords as a result of the CVA: it had to be borne in mind that the inability of New Look to pay rent in full was a consequence of New Look’s insolvency, not the CVA.
Against that backdrop, the court considered that the CVA in fact offered landlords a choice between terminating their lease and going off to find a new tenant, or continuing their lease but on reduced rent and modified terms. These options were far more beneficial than the landlords would receive in an administration, and the differential treatment in the CVA was not unfairly prejudicial.
If you would like to discuss this case and how it impacts you, or for more information generally, please do not hesitate to contact Alexandra Withers at email@example.com.