A recent challenge by landlords to the terms of Company Voluntary Arrangements (CVA) has been making headlines in the property press and, although a decision of the court is some way off, it serves as a useful reminder to consider your position if you are given notice of a CVA. The Powerhouse case is a challenge by a number of high profile landlords to the terms of Powerhouse’s CVA. We are following the case to see how it progresses through the courts. Currently only procedural steps have been taken. There was a directions hearing in May, which scheduled the substantive hearing for the first available date after 24 October 2006.

For a brief overview of the Powerhouse case and issues to consider if you are a landlord, please see below:

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A recent challenge by landlords to the terms of Company Voluntary Arrangements (CVA) has been making headlines in the property press and, although a decision of the court is some way off, it serves as a useful reminder to consider your position if you are given notice of a CVA. The Powerhouse case is a challenge by a number of high profile landlords to the terms of Powerhouse’s CVA. We are following the case to see how it progresses through the courts. Currently only procedural steps have been taken. There was a directions hearing in May, which scheduled the substantive hearing for the first available date after 24 October 2006.

The Powerhouse CVA proposes that Powerhouse continues to trade profitable stores having closed its loss making stores. With the exception of the landlords of the closed stores, all other creditors are to be paid in full. The landlords of the closed stores are to be paid rent arrears up to the date of the CVA as well as eight months’ rent for leases of five to eight years and 12 months’ rent for leases over eight years. These payments release Powerhouse from all on-going liabilities. In addition - and more significantly - the CVA also seeks to release the guarantees given by Powerhouse’s parent company, Pacific Retail Group.

What makes the Powerhouse CVA stand out is that the Pacific Retail Group is solvent and is funding the CVA in exchange for being released as guarantor of the closed store leases. The affected landlords are seeking to strike out these provisions on the basis that they are unfairly prejudicial and/or the legislation does not permit such arrangements.

CVAs are a form of corporate rescue procedure to ensure the survival of a company and we expect landlords to encounter these more frequently. Pending the outcome of the Powerhouse case, we recommend that if presented with a proposal for a CVA, landlords should:

  • consider the wording of the proposal carefully
  • consider what is proposed in respect of rental liabilities, for instance, does the CVA make proposals for future liabilities as well as rental arrears?
  • check the wording carefully to see whether the proposal seeks to release guarantors. If it does try and carve out a reservation of your right as creditor to pursue the guarantor
  • act quickly. If you are not happy with the proposal and it is approved by the requisite majority of creditors you only have 28 days within which to make an application to court

We will continue to follow the progress of the Powerhouse CVA challenge and will update you as soon as we have more information. The CVA has a number of interesting elements that may have a significant impact if not successfully challenged and we will be producing a more detailed guidance note shortly.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 22/06/2006.