Debenhams won the approval of its creditors, as well as the majority of its landlords, to go ahead with a CVA back in May this year. However, in a bid to prevent the CVA from proceeding on the terms proposed, one of its landlords, Combined Property Control Group (CPC) – the landlord of six department stores in England, challenged the CVA on the basis that it was unfairly prejudiced.

Under the terms proposed Debenhams’ leases were split into different categories which reduced the rent and forfeiture obligations by various degrees. CPC challenged the CVA on five technical grounds arguing, amongst other things, that the rent reduction was automatically unfair (and contrary to the fairness test under the Insolvency Act) and that it treated landlords less favourably than other unsecured creditors.

In an important judgment the court rejected four of CPC’s five arguments. In relation to the fairness test, the court held that the rent reduction was not inherently unfair. In coming to this conclusion the court took into account evidence that the properties were over-rented and that the CVA therefore simply aligned the rental to market value. In relation to the argument that landlords were treated less favourably under the CVA, the court decided that differential treatment between different classes of creditors does not, of itself, make the CVA unfair. The court drew a distinction between suppliers on short term contracts, who could force a company to cease trading if they stopped supplying goods, and landlords who generally benefitted from long leases which were over-rented. On that basis, the court accepted that suppliers could be treated differently to landlords and that doing so was not unfair.

This decision is unlikely to be welcome news for landlords: CVAs have been perceived as the bane of high street landlords over the last few years as many national retailers have used CVAs to reduce their lease liabilities which has had a significant impact on many landlords’ bottom line.

There are, however, some positives for landlords to take from this decision. Firstly, and most importantly, the Court upheld CPC’s argument that it was unlawful for a CVA to amend the landlord’s right of forfeiture in the lease. Going forward this means that any attempt by a CVA to modify or curtail a landlord’s right of re-entry will not be enforceable and a landlord will be free to enforce its right to forfeit in the usual way. Finally, the court acknowledged that a CVA may be unfair where landlords were expected to accept rent reductions below market value. Whilst this may be cold comfort for CPC, it does mean that where a landlord can show that it is left with premises that are under-rented, it will have a stronger hand in which to challenge the terms of the CVA.