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BHS Company Voluntary Arrangement – Landlords Win on Penalties

Collapsed retailer British Home Stores cannot challenge its own company voluntary arrangement as an unenforceable contractual penalty and must repay rental discounts to its landlords, the High Court in England and Wales decided yesterday.

The case, in which Hogan Lovells represented the successful landlord, provides important guidance on the operation of company voluntary arrangements (CVAs), particularly after termination, and the payment of rent as an expense of a company’s administration in priority to other debts.


A CVA is an insolvency process that allows a company to settle its unsecured debts with creditors, or come to an arrangement with them over its affairs.  They have become a popular tool for struggling retailers and restaurant chains to improve their financial position by reducing rents and off-loading unprofitable leases.  If approved by three quarters by value of creditors voting on the CVA, it binds all creditors regardless of how or whether they voted.

Background to the case

In 2016, BHS entered into a CVA with its creditors, reducing rents by up to 75%.  The CVA provided that, if it was terminated, these discounts would be deemed never to have happened so that all landlords would have the claims against BHS that they would have had if the CVA had never been approved.

Just a month later, BHS entered administration.  The administrators traded from the BHS stores whilst looking to sell the business, paying the reduced rents under the CVA.  When no buyer was found, the company was liquidated and the CVA terminated.

The liquidators sought directions from the High Court to determine whether BHS was obliged to honour its agreement to pay full contractual rents to its landlords dating back to the approval of the CVA, arguing that this would amount to a contractual penalty.  The rule against penalties makes unenforceable any contractual provision which imposes liabilities on a party for breaching their obligations that is out of all proportion to the other party’s interest in the contract being performed.  It provides relief, as a matter of public policy, against oppressive contracts where there was an imbalance of bargaining powers.

The High Court’s decision

Finding for the landlord, the High Court decided that the rule against penalties did not apply to CVAs, and BHS had to pay the full back rent as an expense of the administration.  The Court held:

  • A CVA is a hypothetical contract to which it is unnecessary and inappropriate to consider the usual principles of contract formation.
  • It was impossible to see how the rule against penalties could apply where there was no negotiation, or how a company putting forward a CVA could subsequently claim to have been oppressed by it.
  • There are limited statutory grounds for challenging a CVA, and a strict 28 day timescale. There is no room in that process for separate grounds of challenge.
  • The landlords had a legitimate interest in the CVA’s success or failure and it was not exorbitant, extravagant or unconscionable for them to be returned to their pre-CVA position if it should fail.
  • The clear intention of the CVA was to ensure that landlords were not disadvantaged if the CVA was terminated, by being forced to accept a concession which was expressed only to apply while the CVA remained in force.
  • Administrators had to pay amounts accruing in respect of any period during which they used premises for the purposes of the administration.  This included sums that were only contingent or yet to be ascertained at the time, such as an uplift under a rent review that had not been determined

Anthony John Wright and Geoffrey Paul Rowley as joint liquidators of SHB Realisations Limited (formerly BHS Limited) (in liquidation) v The Prudential Assurance Company Limited [2018]