The Court of Appeal battle over New Look's company voluntary arrangement may have been quietly settled out of court but the war between landlords and tenants over the use of CVAs is far from over.

Last year, the British Property Foundation wrote angrily to Lord Callanan, Minister for Business, Energy and Corporate Responsibility, to highlight one of commercial property's biggest bugbears, the “abuse” of company voluntary arrangements by some retailers during the pandemic.

There was a blizzard of legal challenges by landlords to the restructuring process in 2021 and major reform appeared inevitable. And then, well, not a lot happened.

CVAs are legally binding agreements with a company's creditors to allow a proportion of its debts to be paid back over time and need 75% of the creditors, by value, to support the proposal.

The arguments against them essentially say they disproportionately hit landlords through rent reductions, writing off arrears and site closures. But the BPF also highlighted a real concern – that they have been cynically used by some wealthy high-street businesses, often backed by global highly leveraged private equity, to shift the cost of the pandemic, plus plain old under-investment and bad management, on to property owners.

Last year saw a slew of landlord creditors, including the biggest names in the country such as British Land, Landsec, M&G and Hammerson, challenge CVAs citing unfair prejudice or material irregularity.

In each case, though, the landlord arguments were essentially knocked back, especially in the cases of New Look and Regis. The former's CVA was challenged on the grounds that the proposal to force landlords to accept a turnover rent instead of the contractual rent in exchange for extra rights for the landlords to take the premises back to re-let, was fundamentally overhauling the contractual agreements and was therefore unfairly prejudicial. The landlords’ claims were rejected by the High Court on 10 May 2021.

The Regis CVA was based on many of the same grounds of challenge as those in the challenge relating to material irregularity and unfair prejudice. While it was revoked, the majority of the landlord arguments failed.

In the High Court case on Caffè Nero’s CVA, the landlord’s allegations of material irregularity and unfair prejudice were again thrown out.

Useful guidance on the use of landlord CVAs was provided along the way, but it has been a miserable outcome for landlords and unsurprisingly many appealed, particularly as they continue to face billions of pounds of outstanding rental arrears accumulated during the pandemic.

The UK’s new restructuring plan, which came in to force last year and was used by Virgin Active, can bind secured creditors and “cram-down” dissenting classes of creditors. This could lead to a better outcome for landlords, as the burden will be shared among landlords and banks. But CVAs remain the go-to place for retailers.

A hearing was due to take place on 1 and 2 March at the Court of Appeal into a combined landlord challenge to the New Look case, but in a surprise move, the matter was settled the evening before the hearing was due to start. What had been seen as a critical opportunity for the Court of Appeal to reconsider the points raised by commercial landlords had passed over with no detail of the settlement released.

But behind the scenes, British Land has been quietly preparing for a test-case legal challenge to Clarks' 2020 CVA in a move that could redraw the battle lines.

In April 2021 BL filed a legal challenge to the restructuring of the near 200-year-old footwear chain Clarks via a CVA that had been approved by more than 90 per cent of creditors in November 2020.

A hearing is expected later this year, but there appears to be a consensus in legal circles that a settlement will be reached before the case begins.

The Clarks CVA allowed 60 of its 320 stores to not pay rent while the remaining 260 moved to turnover or revenue-based rents. The transaction had been crucial in enabling the high-street retailer to secure a vital £100 million investment from Hong Kong investor LionRock Capital.

When the CVA was approved, Melanie Leech, the chief executive of the British Property Federation, said Clarks was exploiting the government’s moratorium on evictions, failing to pay rents owed since March, despite being able to reopen and benefiting from significant government financial support. She said the deal undermined the government’s code of practice.

A hearing could, then, have a profound impact on the use of the CVA process and the use of turnover rents. Moves towards these rents, which means all or a proportion of the rent is based on the tenant's turnover at the premises, have been a notable feature of the pandemic. New Look's approved CVA, for instance, transferred rents across its 402 stores to a turnover percentage set at up to 12%.

The BPF is taking a lot of comfort from the tender issued at the end of last year by the government's Insolvency Service for research into how landlords may have been disproportionately impacted by high street CVAs.

The government cited the concerns raised by the BPF that these arrangements unfairly target commercial landlords and said it is responding to the “number of legal challenges to CVAs brought forward by landlords”, noting the challenges to the New Look and Regis arrangements, and that “such challenges have led to ongoing questions about the underlying policy that supports the legal framework in this area”.

While it is not a full-scale review, it will help government understand how landlords are treated compared with other creditors, in CVAs undertaken by large businesses in retail trade, accommodation or food and beverage service activities.

Speaking to CoStar News, the BPF said it was as a "really positive development, and potentially a first step towards a more fundamental review of CVAs".

Mathew Ditchburn, head of the Hogan Lovells real estate disputes team and chair of the Property Litigation Association, agrees that in terms of new CVAs coming through, the landscape for national retailers and leisure operators has been relatively quiet since the end of 2020 but says there are a number of possible reasons for an issue that is not going away.

"The host of measures introduced by government to protect and support businesses through the pandemic has certainly been a factor. As is the fact that for larger companies the new restructuring plan process may be seen as a better option since the mechanism for 'cramming down' dissenting creditors potentially enables tenant companies to compromise their rental liabilities without needing any landlord support at all."

Dominic Curran, assistant policy director, BPF agrees that the slowdown in the wave of retail CVAs in the pre-pandemic period and extensive government support to businesses over the past two years certainly helped steady the market.

But he says that economic headwinds make retail’s recovery uncertain, and there could be a rise in CVAs in the coming year.

Should that happen, Curran says there are important differences in the legal context today compared with 2019.

"Firstly, comments by the High Court in the New Look case make ‘vote swamping’ – whereby unimpaired creditors can effectively load all the costs onto a minority, who were usually landlords more likely to make a future CVA unfair. Secondly, the judgement in the Regis case seems to have spelled the end of the 75% discount being applied to the value of landlords’ votes."

Curran says wider reform of the CVA regime is still needed. "The Insolvency Service has recognised property owners’ concerns about their treatment in the CVA process and has commissioned a review from RSM into their operation. This review should provide an evidence base for that reform.”

Doug Robertson, restructuring and insolvency partner at Irwin Mitchell, says his suspicion is that the outcome of the previous challenges is a compromise: "both sides are now seeking to avoid forcing the issue with a CVA".

"I anticipate there is more appetite for negotiated agreements rather than forcing terms with a CVA," Robertson adds.

But Ditchburn says that, without doubt, the days of CVAs being an easy win for tenant companies are long gone.

"They can now expect any CVA which singles out landlords for special treatment to be controversial and likely to face serious opposition, if not challenge in the courts. That is not to say that these sorts of CVAs are gone forever; but they are perhaps more likely to be a feature of the mid-market going forward, especially in the event of the expected downturn."

Ditchburn says that while it's true that industry does not have the benefit of any recent Court of Appeal decisions on CVAs, there are some important lessons from the High Court decisions, which still stand even for cases that settled on appeal.

"In the New Look case, for example, the judge said that 'vote swamping' was likely to make a CVA unfair, where the vote was carried by a large number of unimpaired creditors. That alone would make a large number of the CVAs we have seen in recent years unfair.

"In the Regis case, the judge made clear that where the shareholders of the company put in no new money but see their existing debts paid in full, then the CVA is likely to be unfair. Not only that, but an insolvency practitioner who puts forward such a CVA for the creditors to vote on is likely to be in breach of duty."

And Ditchburn adds that it should not be forgotten that the convention of applying a 75% discount to the value of landlords’ votes in a CVA, long-opposed by landlords who have seen this as no more than a means of making sure they are outvoted, was finally found in Regis to be unacceptable. "Again, many of the CVAs we have seen in recent years would not have been approved but for that discount."