Drafting CVAs—it’s all about the fine print

In what circumstances can a creditor's claim fall outside the terms of a company voluntary arrangement (CVA)? James Morgan and Matthew Weaver, barristers at St Philips Chambers, consider the judgment in Oakrock Ltd v Travelodge Hotels Ltd and offer some practical advice on the drafting of a CVA.

Original news

Oakrock Ltd v Travelodge Hotels Ltd and others [2015] EWHC 30 (TCC), [2015] All ER (D) 119 (Jan)

The claimant, Oakrock, agreed to grant a lease of a hotel to the first defendant, Travelodge, on the understanding that Travelodge would carry out refurbishment work at the hotel. The Travelodge Group later entered into a CVA, under which the rent for the hotel was reduced. Oakrock brought proceedings against Travelodge and the other defendants claiming, among other things, that the work had not been fully or properly carried out and seeking damages for loss of rent following the making of the CVA. Travelodge sought summary judgment against Oakrock. The Technology and Construction Court dismissed Travelodge's application for summary judgment on the whole claim, but held that claims which were excluded by the terms of the CVA would be struck out.

What was the background to the summary judgment application?

Oakrock and Travelodge entered into a business sale agreement in November 2007 (the agreement). In short, the agreement provided for Oakrock to grant Travelodge a 35-year lease of its hotel and for Travelodge to undertake refurbishment works. Oakrock was to fund the refurbishment up to a maximum of £1.8m in return for which the rent payable by Travelodge would be increased by £7,000 for every £100,000 thereby spent by Oakrock.

In September 2012, Travelodge's creditors approved a CVA. The CVA divided all Travelodge's hotels into five categories. Category 1 hotels were to pay rent as before, category 2 hotels were to have their rent reduced to 75%. The hotel in question was in category 2.

Oakrock claimed that the refurbishments had not been fully or properly carried out. It put its claim for loss in different ways and in summary:

• but for the failure on the part of Travelodge to properly carry out the refurbishment works and/or overcharging Oakrock for the same, the hotel would have been in category 1, thereby entitling Oakrock to receive full rent not 75% thereof, alternatively

• had the works been properly carried out, Oakrock would have given notice to vacate the lease (as provided for in the CVA) and re-let the hotel on the open market, receiving a rent greater than that payable under the terms of the CVA

Travelodge applied for summary judgment on the grounds that the claims were caught by the CVA and, as such, bound to fail.

What were the legal issues that the judge had to decide in this application?

The judge was required to determine whether the claims advanced by Oakrock related to the lease and were therefore prohibited by the terms of the CVA which, by cl 3, imposed a moratorium on such claims by landlords.

What were the main legal arguments put forward?

Travelodge submitted that Oakrock's claims for losses amounted to the seeking of payment 'of any Liability relating directly or indirectly to a Lease...or other document supplemental to a Lease' which was barred by cl 3 of the CVA. The CVA defined 'Leases' (in respect of category 2 hotels) as 'real estate leases or agreements for lease'. Travelodge argued that either the agreement was a lease or a 'document supplemental to a Lease' and therefore caught by the CVA. Travelodge also relied on full and final settlement (cl 9.4) and waiver (cl 9.11) provisions in the CVA in relation to landlord claims.

What did the judge decide, and why?

The judge concluded that the claims for the 25% balance of the rent based on the failure to carry out the works properly, or overcharging for those works, preventing the hotel falling within category 1 (which would have entitled Oakrock to full rent) were caught by the terms of the CVA and, as such, bound to fail. The claims were under a category 2 lease and fell squarely within cl 9.4 of the CVA. They were therefore struck out.

However, in respect of the claim based upon the argument that Oakrock would have given notice to vacate and then re-let the hotel for more than the 75% of the contractual rent provided by the CVA, the judge concluded that this was not caught by the CVA. Clause 9.4 of the CVA could not apply to a claim which, in essence, proceeded on the basis that there would have been no lease in existence once the notice to vacate had taken effect.

Further, cl 9.11 of the CVA did not apply to such a claim because the judge concluded that a claim based upon a breach of the agreement, rather than a breach of the lease, was not excluded. Clause 9.11 prevented claims arising from a category 2 lease, defined as an agreement to lease or a lease itself. The judge determined, taking the provisions of the CVA as a whole, that this provision meant that claims under an agreement for a lease were only caught by the CVA unless and until a lease had been executed, at which point only claims under the lease were caught.

This claim was therefore allowed to proceed.

To what extent is the judgment helpful in clarifying the law in this area?

First, at para [9] the judgment contains a helpful confirmation of the relevant legal principles to be applied by the court when determining a defendant's summary judgment application.

Second, by reference to an unreported decision of Mann J in Tanner v Everitt [2004] EWHC 1130 (Ch), [2004] All ER (D) 192 (May), at para [22] the judgment provides a useful reminder that CVAs may be deemed to include an implied term to the effect that the company will not rely on the expiry of limitation periods while the CVA is in force.

Third, the judgment emphasises that a CVA is a form of contract and therefore, in line with the approach to the construction of other commercial contracts or documents, stands to be construed so that it makes commercial (rather than literal) sense.

What practical lessons can those advising in such cases take away from this judgment—particularly in terms of drafting CVA proposals and the potential claims that could nonetheless be brought by creditors bound by a CVA?

On the basis of the arguments before the judge, the CVA provisions were not drafted widely enough to cover all claims under the agreement as opposed to under the resulting lease. This could have been avoided if the drafting of the relevant clauses had reflected the fact that, notwithstanding the grant of the lease, the agreement might not merge with it but rather continue to have an independent existence, particularly in circumstances where notice could be given to vacate the lease. It is not uncommon to find that CVAs contain terms which are inconsistent or fail to address foreseeable scenarios.

By way of footnote, cl 22.1 of the CVA did contain a very wide 'full and final settlement' provision which might be thought to bar even claims under the agreement because it expressly compromised any liability provable under rule 12.3 of the Insolvency Rules 1986, as if Travelodge had been wound up at the date of the creditors' meeting (as to 'provable' debts see further In re Nortel GmbH (in administration) and other companies and other appeals [2013] UKSC 52, [2013] 4 All ER 887). But this argument was not pursued by Travelodge and the judge declined to make any conclusions about it.

Interviewed by Kate Beaumont.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

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In what circumstances can a CVA be proposed and by whom?

The process and effect of approval of a company voluntary arrangement (CVA)

Insolvency issues for landlords

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First published on LexisPSL Restructuring and Insolvency