This document discusses how struggling businesses can terminate unprofitable property leases while still being fair to landlords through methods like Company Voluntary Arrangements. It provides the example of retailer JJB, which closed 140 unprofitable stores through a CVA that paid landlords six months rent and bore business rates costs. CVAs allow negotiating lease terminations to focus on profitable operations and provide some payment, unlike liquidation. Courts ensure CVAs pass vertical and horizontal tests to treat landlords fairly compared to liquidation outcomes and other creditors.

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Published on 11 November 2010 by Tony Groom
A Business in Difficulty Can Terminate its Property Leases and be
Fair to Landlords
In April 2009 the retailer JJB successfully proposed a CVA designed to save 250 stores
and 12,000 jobs. It has become the model for subsequent CVAs in the retail sector.
The proposal included closing 140 unprofitable stores but made available a fund of
£10m for the landlord creditors of these premises, equating to a payment of
approximately six months rent.
JJB also made a significant compromise in bearing the substantial costs of the
business rates of the unprofitable stores. The landlords of the open stores were
offered the passing rent on a monthly basis for a period, after which the standard
contractual quarterly payments would be reinstated.
No leases were ‘torn up’ by the CVA and it was left to individual landlords to decide
whether they wished to accept a surrender, consent to an assignment or forfeit the
lease.
The landlords as a group recognised that there was a substantial risk that JJB would
go into administration, which would have meant that they received no payments of
rent or business rates for the closed stores. They appreciated being consulted in a
transparent process and being offered a genuine compromise.
It often happens that the core of a struggling business is viable and it need not go
into administration if it can be restructured to focus on the parts that are profitable.
That can be beneficial to the creditors too, because they will then see some return
on what they are owed, as the above example illustrates. In many cases the
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2. creditors will include landlords who own the property or properties from which the
business is trading.
While the landlords’ rights for dealing with arrears are included in the lease they
usually include both the right to seize assets from premises to cover arrears or the
right to forfeit the lease and claim loss due to breach of contract.
The forced termination of a lease can only be done by a liquidator following a
company’s liquidation. If a company goes into administration and is sold the
Administrator can also force termination of those leases no longer required.
However, in the JJB illustration above, negotiation with the landlords to terminate
some leases was made possible by proving to them how much they would receive in
the event of a liquidation and showing that the alternative offer set up using a
Company Voluntary Arrangement (CVA) was better than liquidation.
Another way of using a CVA to deal with lease liabilities is to crystallise them and
include the landlord(s) as creditors although this only really works with vacant
premises.
Forcing a change in the terms of a lease is extremely difficult and the courts will want
to test whether or not a landlord has been treated fairly as a creditor in a CVA,
regarded as vertical and horizontal tests.
The vertical test considers whether or not a landlord’s outcome is better or worse that
would have been achieved in liquidation and may require expert opinion.
The horizontal test compares the landlord as a creditor with other creditors and
where contingent creditors may vote but are excluded if a CVA is approved then
the Court considers creditors by class as would be applied in a Scheme of
Arrangement under Part 26 of the Companies Act 2006 (formerly s425 of the
Companies Act 1985).
While terminating leases might logically be handled by a lawyer, assistance from
business rescue advisers or insolvency practitioners can help by carrying out a
business review and producing a comparison of outcomes to show the outcome for
landlords in the event of liquidation to help justify them accepting an offer that
avoids liquidation.
We are not Insolvency Practitioners. We operate within the law to protect our clients and their wealth.
Our team has worked for over 20 years to help stabilise and return hundreds of businesses to
profitable growth. Once appointed, Insolvency Practitioners do not work for you, they work for creditors
and use your company’s assets to pay themselves. We work for you, not creditors.
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Call Tony Groom on 0844 8040 540