A commercial landlord has won a dispute with the liquidators of the former BHS retailer over the payment of rent.
The issue arose because BHS had entered into a Company Voluntary Arrangement (CVA) to pay reduced rents to landlords of its stores and offices.
The agreement contained a clause stating that if the CVA was terminated, the reduced rents were deemed never to have happened. The landlords would then be entitled to claim against the company for the original, full rents, less any payments made during the CVA.
The CVA could not prevent the company from going into administration in April 2016, which prompted one of the landlords, Prudential Assurance Ltd, to trigger the CVA’s termination clause relating to the payment of the rent in full.
The BHS liquidators submitted that the clause operated as a penalty as it forced the company to pay the landlords sums in excess of the agreed reduced rents. It was therefore invalid.
Prudential argued that it was owed the outstanding rent on the full rent basis, some of which should be payable as an administration expense for a period during which the original administrators had continued to trade from its premises.
The court found in favour of Prudential. It held that the clause in the CVA was not a penalty. It had not been subject to negotiation by the two sides. It was brought about by a statutory procedure under the Insolvency Act and was binding on both the company and the creditors.
The landlords had a legitimate commercial interest in the CVA’s success or failure, and it was not an exorbitant provision for them to be returned to their pre-CVA position if it failed.
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