The High Court (Norris J) has upheld the validity and effect of Debenhams’ company voluntary arrangement (CVA), subject to certain modifications that it deemed made to protect the landlord creditors’ right of forfeiture.

The landlords had challenged the CVA on grounds that the CVA exceeded its jurisdiction because:

• The landlords were not “creditors”: their claim for future rent was not a “debt” but was instead an unearned future payment.
• The CVA provisions reducing rent payable under relevant leases purported to change the terms of the leases.
• The CVA purported to restrict the landlords’ proprietary rights of forfeiture. (This argument succeeded.)

The landlords also claimed that:

• The CVA unfairly prejudiced the landlords as it treated them less favourably than other unsecured creditors without proper justification.
• There had been a material irregularity in the CVA process because there were potential clawback claims available to Debenhams if it went into administration which had not been disclosed in the CVA.

The landlords, who were funded to challenge the CVA by an aggrieved shareholder and creditor of Debenhams (Sports Direct) failed on all but the point in relation to forfeiture. However, even that success is arguably academic: the court was clear that while a CVA could not directly restrict a right of forfeiture, there was no difficulty with a CVA that reduced the obligations of the tenant so that the right of forfeiture would be less likely to be triggered in practice. Accordingly, it simply ordered the offending provisions on forfeiture to be deemed deleted.

The finding that the CVA was not unfairly prejudicial to the landlords nor subject to a material irregularity was inevitably fact-based. However, of particular note is the importance of the fact that the CVA did not propose reductions in the rent payable to the landlords to a level below market value. The right of the landlords to exercise break clauses was also a strong factor.

The court’s analysis that the landlords did constitute “creditors” in respect of their claim for future rent is perhaps the most interesting part of this decision. Although the argument that future rent is not a debt capable of being subject to a CVA was perhaps formulated as a long shot, it took up a great deal of the court’s analysis. (Discovery (Northampton) Limited and others v Debenhams Retail Limited and others [2019] EWHC 2441 (Ch) (Norris J).)

Source: Practical Law

In Taylor v Mina An Ltd [2019] UKUT 249 (LC), the Upper Tribunal (Lands Chamber) considered the licensing requirements for a house in multiple occupation (HMO) where the landlord had sold its interest.

Where a residential property is a house in multiple occupation (HMO), the person who has control of, or manages, the property must obtain a licence from the local housing authority (LHA) under the Housing Act 2004 (HA 2004). It is a criminal offence to not have an HMO licence if one is needed (section 72(1), HA 2004). A licence is personal and cannot be transferred on a sale of the property (sections 68(6), HA 2004).

In October 2016, P bought the landlord’s interest in an HMO from S. S had been granted a licence in 2016, which would expire in 2021. P did not apply to the LHA for a licence until May 2017, and the licence was granted in September 2018.

T, who had been a tenant of the property, applied to the First-tier Tribunal (FTT) for a rent repayment order (RRO), as P had committed an offence by not having a licence. The FTT dismissed T’s application, noting that the property was licensed as S’s licence had not expired. T appealed.

The Upper Tribunal (Lands Chamber) (UT) allowed the appeal. S had sold the property to P, and P required a licence. S’s licence could not be transferred to P. The fact that S’s licence had not been expressly revoked was of no assistance to P.

Practitioners acting for the purchaser of the reversion of an HMO must be alert to the need to apply promptly for a licence. Under section 68(2) of the HA 2004, a licence can be granted before it is required, to come into force at the point when it is required.

Source: Practical Law

The European Medicines Agency has announced that it is withdrawing its appeal against the High Court judgment that Brexit would not frustrate its lease of premises in Canary Wharf.

The European Medicines Agency (EMA) has announced that it has settled its dispute with the Canary Wharf group and will not now be appealing against February’s High Court judgment that Brexit would not frustrate its 25-year lease of premises in Canary Wharf (see Legal update, UK’s departure from the EU will not frustrate lease (High Court) (full update)). According to an announcement on the EMA’s website, the EMA has sublet the entirety of the premises in dispute for a term to the expiry of the EMA’s lease in 2039.

The litigation has shone a spotlight on the doctrine of contractual frustration and acted as a reminder of its narrow constraints. More specifically, the case has highlighted the difficulties parties to commercial contracts are likely to face when seeking to prove that Brexit has frustrated their contract. However, the High Court judgment has left some unanswered questions, notably the possibility of invoking Brexit as a frustrating event in relation to other contracts concluded before Brexit became reasonably foreseeable. Practitioners may be disappointed that the Court of Appeal will be denied the opportunity to address these issues.

Source: Practical Law

Assured shorthold tenancies (ASTs) grant tenants a minimum of six months security of tenure. Any order for possession following service of a notice under section 21 of the Housing Act 1988 (HA 1988) will not take effect earlier than six months after the beginning of the original tenancy (section 21(5), HA 1988).

The government believes that longer tenancies would be more beneficial to both tenants and landlords. On short term contracts, tenants face instability, a lack of power and the potential cost of unplanned and unwanted moves. On the other hand, longer tenancies would save time and money spent on unnecessary renewals. 

Therefore, the Ministry of Housing, Communities and Local Government (MHCLG) is consulting on its proposed model for a minimum three-year residential tenancy with a six-month break clause, and the options for implementing this.

The main facets of the model would be:

• A three-year term with an opportunity for either landlord or tenant to leave the agreement after the initial six months.
• Following the six-month break clause, the tenant would be able to end the tenancy by providing a minimum of two months’ notice in writing.
• Landlords would be able to recover their property during the fixed term if they had reasonable grounds, akin to the grounds under Schedule 2 to the HA 1988.

Certain tenancies will fall outside the parameters of the new regime: for example, holiday lets which realistically do not last for three years. Further, rents would only be able to increase once per year, and any agreement on rent should be detailed in the tenancy agreement.

The government is considering particular aspects of implementing the new regime, including the need for legislation, tax relief for landlords, and awareness raising initiatives.

The consultation closes on 26 August 2018. The proposals apply to England only.

Source: MHCLG: Overcoming the barriers to longer tenancies in the private rented sector (2 July 2018) and Practical Law.