by Jackie Buckley , Matthew Austin March-10-2021 in Property, Commercial & Business

The position of Landlords and the protection of their property rights has become much more complicated in recent years. Our Shopping Centres and High Streets are full of retail brands originating outside of Ireland. Tough economic conditions and more recently closures because of COVID-19, operating in this environment brings its challenges. It also means that the success or otherwise of these stores is to a large extent dependent on what happens outside of the jurisdiction. This is even more evident in the recent High Court judgment affecting the Monsoon chain of stores in which Judge McDonald considered the impact of a UK governed Company Voluntary Arrangement (CVA) on leasehold interests in Irish commercial properties of the companies that were the subject of the CVA1.

The judgment concerned the interests of Monsoon Accessorize Limited (Monsoon), a company incorporated under the laws of England and Wales.  Monsoon was the tenant of two commercial retail premises – one in Dublin and one in Cork. Monsoon underwent a CVA under the terms of the United Kingdom’s Insolvency Act 1986 which took effect on 3 July 2019.  The CVA purported to modify certain provisions of the Dublin lease and the Cork lease.  It purported to effect significant reductions in the amount of rent payable to the landlords.

The landlords argued that the CVA was not capable of affecting the Irish leasehold interests of Monsoon and that the leases, including the rental obligations, continued with full force and effect.  The landlords also advanced an alternative argument that the CVA should not be recognised by the Irish Courts as modifying the Irish leases by virtue of Article 33 of Regulation EU 2015/848 "The Recast Insolvency Regulation" on the grounds that it would be manifestly contrary to the State’s public policy to do so.

Even though the CVA was not a court-based process, Judge McDonald was satisfied that the CVA constituted a “judgment” “handed down by a court” such that Article 32.1 of the The Recast Insolvency Regulation would normally require to be recognised in all EU member states, including Ireland.

However, Judge McDonald was disquieted by the fact that the Irish landlords were effectively presented with a fait accompli at the creditors meeting which approved the CVA and therefore could not make representations to the meeting which could be considered by the other creditors of Monsoon attending the meeting before casting their votes.

Judge McDonald went on to state as follows:

In the particular circumstances of this case, I have therefore come to the conclusion that the possibility of an application to the English courts to challenge the outcome of the CVA is not sufficient to displace the conclusion which I have reached that there was a fundamental failure to provide an appropriate opportunity to the Irish landlords to make representations to the meeting of creditors which was to take a decision which would have such significant effects on their property rights under the Cork and Dublin leases.

Judge McDonald went on to conclude that his judgment was unlikely to impact upon the general effectiveness of CVAs in relation to Irish leases owing to the procedural failure which arose in this case:

For the reasons outlined above, I have come to the conclusion that the recognition or enforcement of the CVA as against the Irish landlords would be manifestly contrary to the public policy of the State. I stress that this conclusion relates solely to the procedure adopted in the CVA in this case. As mentioned above, it seems to me that the procedural unfairness which arose in this case could have been avoided had appropriate steps been taken in the course of the CVA process to address it appropriately.

Whilst Judge McDonald was careful to explain the unlikelihood of a broader application for his judgment in Monsoon, it is nonetheless useful in confirming the recognition of UK based CVAs insofar as they relate to Irish commercial leases.  It also demonstrates the possibility that an Irish court can be persuaded not to recognise a CVA where there is a procedural shortcoming of sufficient gravity such as would undermine the public policy of the State.

Brexit complicates the picture.  The UK’s Insolvency (Amendment) (EU Exit) Regulations 2019 changed the manner in which the UK engages with the Recast European Insolvency Regulation.  The 2019 regulations govern insolvency proceedings which were entered into prior to, or during the Brexit transition period. They also govern any subsequent secondary or related proceedings which commenced in the post-transition period where the main proceedings were commenced under the Recast European Insolvency Regulation.  However, the long-term picture is murky.  The UK applied to join the Lugano Convention in April 2020, something which would bring some clarity and familiarity to the process of recognising and enforcing UK court decisions in the aftermath of Brexit.  The outcome of that application is awaited.

In the meantime, the position remains fluid, with the importance of secondary enforceable obligations (for example, third party guarantees) in relation to rent obligations becoming increasingly relevant. Before entering into a Lease, Landlords need to consider the circumstances in each individual case including who they are contracting with and if there are any ways of mitigating the risk.

For further information, please contact Jackie Buckley or Matthew Austin 

1 [2020] IEHC 523

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