This briefing note considers whether a commercial landlord can forfeit its tenant’s lease, if the tenant in question is a company, and if it enters into or becomes subject to a “company voluntary arrangement” (“CVA”).
This follows our previous briefing note considering what a commercial landlord’s options are in the face of rent arrears and legislation introduced in response to the COVID-19 pandemic.
Key features of a CVA:
A CVA is an insolvency process which may allow a company to address any financial difficulties, whilst carrying on as a going concern. CVAs can be used in conjunction with administration, which also seeks to save the company. This sets CVAs and administration apart from liquidation, which is the “end of the road”;
A CVA creates the possibility that the tenant can avoid liquidation by coming to a voluntary arrangement with its landlords (and other creditors), in which the landlord will only be paid a proportion of the amount owed, but crucially, it will be paid something and likely more than if the tenant was wound up;
A CVA enables the tenant to reconfigure its debt payments (including the future payment of sums under the lease or repayment of arrears) with the aim of improving its financial health;
The unique aspect of a CVA, is that, in theory, it is voluntary. The tenant’s directors, administrator or liquidator can instigate the CVA. Also, the tenant’s creditors are not obliged to accept the CVA however, they will be deemed to by operation of law (even if they do not accept it or even know about it) if a sufficient majority (usually 75% in terms of the tenant’s indebtedness) of the tenant’s creditors vote in favour of it;
The number of struggling corporate tenants which have entered into CVAs recently (All Saints, Pound Stretcher, Pizza Express and Pizza Hut to name a few) suggests CVAs continue to be popular, because they are considered less costly and more flexible in comparison to “traditional” insolvency processes, and, because CVAs can restructure a tenant’s rent obligations in one fell swoop, making them effective;
A CVA does not automatically impose a moratorium on a landlord’s ability to take action against the tenant, although a moratorium will be imposed, if the CVA is combined with administration. However, the CVA may affect the landlord’s rights to take certain actions (as discussed below) by restructuring the tenant’s debt obligations, likely to landlord’s detriment; and
The incentive to accept the CVA, is that the landlord would likely achieve a better recovery under the CVA, than otherwise. A commercially minded landlord may be willing to accept payment of something, rather than nothing or less. A landlord may be able to challenge the CVA, if it would be “unfairly” prejudiced.
Key features of forfeiture:
Forfeiture is a landlord’s remedy under which it can end a lease and recover possession of a premises, where its tenant is in breach of its lease obligations;
Forfeiture determines the tenant’s (and any other inferior party’s) interest and, for that reason, it is a powerful tool in a landlord’s arsenal. Being locked out of its place of business can, clearly, cause potentially fatal disruption for a tenant;
A landlord must ensure that it forfeits correctly, otherwise the landlord would be liable to its tenant for any loss suffered. Equally, forfeiture will determine any other interests in the property (for example, a mortgagee’s charge or a sub-tenant’s lease), so the landlord must consider these other interests and prospects of recovery carefully, before proceeding;
The right to forfeit may be subject to various restrictions (as discussed below). Therefore, it is imperative that a landlord must take early and specialist legal advice, before considering forfeiture;
A landlord may seek to forfeit a lease due to the non-payment of rent. In the case of rent arrears, a landlord will likely be permitted under most leases to peaceably re-enter the premises (i.e. change the locks) if the rent has been outstanding for a certain period of time, usually around 21 days; and
However, as discussed in my previous note, the right to forfeit for non-payment of rent is currently subject to the moratorium under the Coronavirus Act 2020, which prevents forfeiture of a commercial lease subject to the Landlord and Tenant Act 1954 (or would be subject to the Act but for the lease being “contracted out”) for non-payment of rent. That moratorium will apply until 31 December 2020, but it may be extended.
The good news:
Modern leases commonly provide that a landlord is entitled to forfeit a lease, if the tenant becomes subject to a CVA; and
The Court decided, in the Debenhams* case, that a CVA cannot limit a landlord’s right to forfeit and that any attempt to do so would be void potentially rendering the CVA ineffective. However, this does not prevent the CVA from limiting the landlord’s ability to recover arrears in the future, after the CVA has come into effect.
The bad news: - the position may not be as simple as appears:
Depending on the wording of the forfeiture provision, the right to forfeit may arise at differing times, for example, when the tenant’s directors pass the appropriate resolution, when the IP gives notice of the CVA proposals, or, when the CVA proposals are formally accepted. The lease wording may be ambiguous and therefore specialist legal advice should be acquired to minimise risk. If the right to forfeit is not executed at the correct time, then the landlord will be vulnerable to claims for damages;
As the landlord is seeking to forfeit the lease for breach of covenant other than non-payment of rent, the landlord is obliged by Section 146 of the Law of Property Act 1925 to first serve notice on the tenant. (This is the case regardless of what the lease says);
In the case of a CVA, once the right to forfeit has arisen and notice has been served, the landlord will be entitled to proceed to forfeit the lease immediately by peaceable re-entry, as the tenant entering into a CVA will likely be an “irremediable breach”. The requirement to serve notice means the landlord loses the element of surprise, and, that the process to lawfully recover possession of the premises becomes riskier and complicated;
If the Section 146 notice does not contain the prescribed information or is served incorrectly, then the landlord’s forfeiture will be unlawful, leaving the landlord vulnerable to claims for damages. Advice should be taken to ensure that the statutory requirements are satisfied to minimise risk;
The landlord should take care not to do anything, which amounts to her “waiving” the breach. Waiver is legal ease, but it means that a landlord will lose its right to forfeit, if the landlord reaffirms the existence of the lease, after the right to forfeit has arisen. Such reaffirmation commonly occurs by the landlord or its agent demanding payment of rent or repayment of arrears. Luckily, the tenant entering a CVA is a “continuing breach” which means that right to forfeit will arise the following day, even if it is waived; and
Even if the landlord does lawfully forfeit the lease, its tenant or the IP has, generally speaking, six months to apply to the Court to seek relief from forfeiture (although more time may be allowed depending on the circumstances). If relief is obtained, then the lease will be restored. Relief may be granted, even if a new tenant has taken up occupation, which can cause significant difficulties.
The Court can grant relief on any terms as it sees fit, but will generally aim to put the landlord back in the position it would have been in, if no breach had occurred. In the context of a CVA, it is difficult to see on what basis the Court may grant relief, given the tenant is not in a position to correct its breach of the lease. In the so-called British Home Stores** (“BHS”) case, the Court granted BHS’ IP relief for a period of three months on the condition that the IP was to assign the lease to a third party. Whilst the BHS case related to administration, not a CVA, it is reasonable to assume that the Court may adopt a similar approach in relation to CVAs, given the similarities between the two insolvency processes.
A landlord can (subject to the wording of the lease), forfeit a lease due to its tenant entering into a CVA. However, one size certainly doesn’t fit all, and the process for forfeiture in such cases is not simple. As such, the landlord should take specialist strategic legal advice from an early stage.
If it does not, and if the landlord unlawfully forfeits, then the landlord’s difficulties will be compounded and inevitably delay together with costs will be increased before the landlord secures the premises.
We anticipate a risk, that the Court will become increasingly unsympathetic towards landlords who forfeit leases for what might be considered trivial breaches. Should this occur, the Court could penalise the landlord by refusing to allow it its litigation costs.
Knights’ Property Litigation specialists are well placed to assist either tenants or landlords, facing any such difficulties. For further information regarding the issues raised here, or for more specific advice, please contact a member of the Property Litigation team.
*Discovery (Northampton) Limited and others v Debenhams Retail Limited and others  EWHC 2441 (Ch)
**SHB Realisations Limited v Cribbs Mall Nominee (1) Ltd  WLUK 588