Full Rent Owed If A Company Voluntary Arrangement Fails

Retailers with multiple stores have felt under pressure from online competitors in recent years. The response from a number of retailers have been to enter Company Voluntary Arrangements (CVA). By using this process, retailers have effectively re-written their lease obligations to the detriment of landlords.

One of the biggest CVAs recently was British Home Stores (BHS). Under this document landlords would only receive the rent for their particular store as set out in the CVA. But what happens if the CVA failed?

Would the landlords only be entitled to the rent due under the CVA or would the full rent under the lease be due?  A provision in the CVA from BHS said it was the latter but was that provision in accordance with current law? This was the question for the High Court in Wright v The Prudential Assurance Company Ltd.

The court held that this provision was not an unenforceable penalty for BHS’s breach of the CVA and neither did its effect breach the pari passu principle that unsecured creditors should share equally in an insolvent company’s assets.

If the CVA failed the landlords would therefore be entitled to the full rent due under the lease as an expense of the administration for the period of time whilst the administrators had possession of the relevant properties.

Wright and another (Liquidators of SHB Realisations Ltd) v The Prudential Assurance Company Ltd