A ruling by a judge in London’s High Court is likely to prevent billions of euros being wiped off the value of the property industry. The court ruled that the use of a particular insolvency procedure would unfairly undermine landlords’ rights to receive rent from tenants. The ruling in a case involving Powerhouse, the electrical retailer, should make it more difficult for parent companies to refuse to meet the rental obligations of failed subsidiaries.
A ruling by a judge in London’s High Court is likely to prevent billions of euros being wiped off the value of the property industry. The court ruled that the use of a particular insolvency procedure would unfairly undermine landlords’ rights to receive rent from tenants. The ruling in a case involving Powerhouse, the electrical retailer, should make it more difficult for parent companies to refuse to meet the rental obligations of failed subsidiaries.
The case was backed by major institutional investors and property companies, including Legal & General, Prudential, Hammerson, Derwant London and Land Securities.The case hinged on Powerhouse’s use of a company voluntary agreement (CVA) to avoid paying rent at stores it had closed. The CVA allows companies to avoid liquidations and administrations by striking informal agreement with creditors.
Powerhouse collapsed in 2003 and was sold by liquidators to New Zealand firm Pacific Retail Group, which closed a string of outlets in the subsequent years. Early last year, the group decided to close 35 stores and retain another 53. The company’s directors reached agreement on a CVA that left landlords with only six months rent on the stores that were being closed, the equivalent of 28p for every £1 owed.
The companies said this undermined their rights ensuing from parent company guarantees given by Pacific Retail. The landlords warned that a ruling against them could lead to retailers using CVAs to dump their guarantee liabilities, which could put a huge dent in the value of rental properties.
