Appeal on landlord's challenge to UK company voluntary arrangement settles night before hearing

An eagerly awaited appeal of the high-profile case of Lazari Properties 2 Ltd & others v New Look Retailers Ltd & others has settled, leaving landlords and tenants with no further clarity on aspects of company voluntary arrangements (CVAs), an increasingly litigious area in real estate disputes.

The case was originally heard in the High Court in May 2021 where the landlords (Lazari Properties 2 Ltd and others) was unsuccessful on the various grounds of challenge raised in relation to the CVA approved by the creditors of New Look Retailers Ltd. The landlords expressly invited the judge to depart from the Debenhams case and hold that the CVA was invalid by virtue of its differential treatment of landlords. The judge refused to do so and made it clear that, in certain circumstances, a CVA may be unfairly prejudicial.

The judge held that any potential prejudice was sufficiently addressed by offering a termination right in the CVA proposal in return for imposing lease modifications, provided that the terms offered for the notice period were better than the alternative the landlord would receive on an administration or liquidation. The landlords were afforded a choice: whether to stay with the CVA terms or to take the property back.

The landlords were granted leave to appeal in May 2021, but the parties settled the case the night before the hearing. As the Court of Appeal did not have the opportunity to revisit the issues highlighted by landlords at first instance, the original High Court decision sets out the latest legal standpoint on how landlord claims ought to be treated.

However, with restructuring plans and CVAs becoming prominent in the news in light of deteriorating economic conditions, there will no doubt be further case law in this area.

Dispute background

The creditors of New Look Retailers Ltd (the respondent) approved a CVA. The arrangement differentiated between its creditors so that certain landlords were disproportionately impacted. Liabilities of landlords of distribution centres, trade creditors and employees would be largely met, but landlords of trading premises would only obtain a turnover rent, reduced dilapidation contributions and New Look had a right of termination after a specified period.

The CVA was challenged by various compromised landlords including Lazari (the appellant), on the basis that it did not fall within the meaning of a valid company voluntary arrangement under section 1 Insolvency Act 1986.

Appellant's arguments

The claim was heard in the High Court where Lazari argued that the company voluntary arrangement fell outside of section 1 of the Insolvency Act 1986 on the following grounds:

• Statutory jurisdiction – the CVA did not amount to a valid one under the Act as it was a series of separate arrangements treating creditors differently;
• Unfair prejudice – the differentiation between creditors and unwarranted interference with landlord's rights represented an unfair prejudice;
• Material irregularity – there were material omissions and inaccuracies in the proposal.

Tenant's favour in the High Court

The landlords were unsuccessful in challenging the CVA and the court dismissed the challenges on all three grounds. The CVA was held to be valid, notwithstanding the differential treatment of creditors. In respect of Lazari and others' arguments it was decided as follows:

• Statutory jurisdiction – notwithstanding the principles of good faith and equality, treating creditors differently was insufficient to invalidate the company voluntary arrangement. Where different treatment is given to different sub-groups of creditors, this does not fall outside the jurisdictional scope of section 1(1) of the Act.
• Unfair prejudice – this was dismissed on the basis that differential treatment as between unimpaired and compromised classes does not in itself create unfair prejudice. By comparison, the landlords would be worse off had New Look entered into an administration. The fact that the landlords were granted the right to terminate the leases provided the key answer to their complaints of unfair prejudice.
• Material irregularity – while the judgment only briefly went into material irregularity, it was dismissed on the basis that there was no material non-disclosure. In particular, the application of a discount to landlords' claims for voting purposes (here, a 25% discount to landlord's contractual right to future rent for the lease term) was not a material irregularity.

The High Court also determined that there is no general principle that a CVA cannot reduce below market rates to achieve the purpose of the company voluntary arrangement (that is, the Debenhams case had not laid this down as a principle). The judge considered that the fairness of the modification proposed to the lease was a commercial question and not one to be considered by the court.

Appeal dismissed with consent

The claim was appealed to the Court of Appeal in March 2022; however, it was dismissed with consent due to the parties having agreed settlement in the matter the night before the hearing commenced.

While the court approved a simple consent order for the disposition of the appeal with no order as to costs, the court requested an explanation as to why settlement had not been focused on by the parties prior to this.

The court commended any commercial resolution, particularly where there are complexities with major litigation, but was frustrated by the significant disruption caused by the preparation of a two-day hearing with substantial papers, where permission to appeal had been granted in May 2021 and skeleton arguments had been filed in October 2021.

Osborne Clarke comment

Unfortunately, we do not have the further clarity that some were hoping for in this area of law. However, it is reasonable to assume that even though the landlords were not successful at first instance, by taking action initially and by pursuing the appeal they managed to put themselves in a stronger bargaining position than they were in previously. As they have now reached settlement terms, we can surmise these were more commercially advantageous to them than the terms of the proposed CVA would have been, and potentially more advantageous than successfully revoking it (which could result in the tenant entering an even less favourable insolvency procedure).

In area of such uncertainty, landlords would be well advised to engage with the tenant/nominee as early as possible – preferably before the creditors' meeting. As and when the first proposal becomes available, or in some cases where the proposed nominee is liaising with landlords, landlords should seek to gauge the level of support for the proposal and the balance needed to obtain creditor approval before the proposal is formally served.

However, in circumstances where the final form of proposal appears unfairly prejudicial, landlords can hope to achieve one of two alternative outcomes by seeking to challenge it:

• to negotiate an improved position compared to other creditors, for example, moving to a higher category within the proposal (or other commercially acceptable settlement); or
• the revocation of the CVA and the reinstatement of the status quo prior to approval of the arrangement.

It remains the case that landlords have been consistently unsuccessful in most challenges to company voluntary arrangements, as nominees are well advised and proposals are drafted so as to mitigate the risk of a successful challenge. While there are tactical motives for challenges (outlined above), it is still considered risky and landlords should seek legal advice and consider matters carefully before proceeding.