Companies cannot unilaterally impose a surrender of leases under a scheme of arrangement

United KingdomScotland

In September we reported on the consequences of the decision of Norris J in Discovery (Northampton) Ltd v Debenhams Retail Limited [2019] EWHC 2441 (Ch) in which the Court confirmed that a company voluntary arrangement (CVA) cannot interfere with a landlord‘s proprietary right to forfeit a lease.

Hot on its heels came the Court’s decision in In the Matter of Instant Cash Loans Ltd [2019] EWHC 2795 (Ch) a case concerning a scheme of arrangement under Part 26 of the Companies Act 2006 (“Part 26”). Here the Court held that a provision purporting to unilaterally impose a surrender of the company‘s leases on its landlords was interference with a proprietary right, this was not a right arising between the company and landlord as debtor and creditor and therefore was outside the jurisdiction of Part 26 and void.

These decisions confirm that a company cannot use a CVA or Part 26 scheme to alter a landlord’s property rights; whether that be its right to forfeit a lease or the ability to determine a lease by compelling a landlord to accept a surrender.

The scheme

The Part 26 scheme of arrangement proposed by Instant Cash Loans Ltd purported to automatically terminate the company’s leases by way of an automatic “surrender” to its landlords, subject only to a landlord’s right to submit a pecuniary claim under the scheme for “disclaimer damages” (i.e. damages calculated as if there had been a disclaimer of the lease by a liquidator).

In the course of the court hearing to sanction the Part 26 scheme, the issue of whether or not the automatic surrender provision was within the jurisdiction of Part 26 was raised by the Judge and considered in-depth as a preliminary point.

The decision

In summary, the Judge found:

• The fundamental principle of a scheme under Part 26 is that it can only deal with rights between the company and a creditor between themselves “as debtor and creditor”.

• Other rights, such as proprietary rights arising from a legal estate in land, including a lease, are outside Part 26, as these are not rights arising between the parties as debtor and creditor.

• A lease cannot be terminated at the will of the tenant alone.

• Imposing a surrender of the leases was not necessary to ensure the effective compromise of a pecuniary liability; it was something additional imposed by the scheme on the landlords and therefore outside the scope of the scheme jurisdiction.

The scheme was ultimately approved, on condition that the offending provision was removed.

The implications

In consequence of the decision in this case and the Discovery case, companies cannot interfere with landlord’s proprietary rights by way of a CVA or Part 26 scheme, as these terms will be void.

So, a company cannot:

1. vary a landlord’s right to forfeit, although it can modify the contractual terms of the lease on which the right to forfeit bites;

2. unilaterally impose a surrender of the lease on the landlord.

The law in this area is evolving as the courts are asked to consider the many legal questions about the legitimate scope of companies using the CVA and Part 26 procedures to discard unwanted properties. It seems it will be only a matter of time before the values involved warrant a challenge to the Court of Appeal or Supreme Court, where a full review of the first instance authorities can take place.

Article co-authored by Dominic Pugh.