Restructuring Plans – A Sea Change?

October 2022

The High Court has considered the effect of a tenant's Part 26A restructuring plan on third party guarantors of the lease. 

The Court held that the guarantors remained liable for the tenant's rental arrears.  This was despite the tenant's obligations under the lease having been compromised under the plan.

This judgment has important implications for landlords, tenants and guarantors, particularly as restructuring plans become a more widely used tool across the UK real estate market, including, for SMEs, as was recently seen in relation to the Houst Limited restructuring plan.

Background 

Nuffield Health Wellbeing Limited (Nuffield) was the original tenant of a lease entered into in 1998 with the landlord, Oceanfill Limited (Oceanfill). 

Nuffield assigned the lease to Virgin Active in 2000.  In connection with that assignment, Nuffield entered into an authorised guarantee agreement (the AGA).  Under that AGA, Nuffield guaranteed Virgin Active's obligations under the lease.  In addition, Cannons Group Limited (Cannons) guaranteed Nuffield's obligations under the AGA.

Virgin Active used the property as a gym.  It experienced serious financial difficulties during the coronavirus pandemic due to the forced closure of its gyms and leisure facilities, including the site in Leeds leased by Oceanfill. 

To address these difficulties, Virgin Active proposed a restructuring plan.  The plan was approved by the Court in May 2021.

Amongst other things, the plan released Virgin Active from all past, present and future obligations and liabilities under the lease with Oceanfill. 

Oceanfill subsequently brought a claim against Nuffield and Cannons arguing that as the rent under the lease had not been paid by Virgin Active, Nuffield and Cannons were liable, notwithstanding the restructuring plan, to pay as guarantors. 

The Claim 

Nuffield and Cannons argued that the legal effect of the restructuring plan was to vary the terms of the lease by reducing the rent to zero and releasing Virgin Active. On the basis of this alleged variation of the lease, Nuffield and Cannons argued that the guarantors should also be released from any outstanding liability under the lease. 

Deputy Master Arkush rejected Nuffield and Cannons' argument stating that the plan took effect by operation of law and that it had not "re-writt[en]" the terms of the lease.  The Court held that the effect of the plan was therefore to compromise, not remove, Virgin Active's rental obligations. The Court ruled that as Nuffield and Cannons were not parties to the plan Oceanfill's rights as against Nuffield and Cannons as guarantors remained unaffected.

Nuffield and Cannons had also argued that as a result of the plan, no rent was due from Virgin Active and therefore no arrears existed.  On this basis, they asserted that there was no breach of the terms of the lease by Virgin Active and consequently Nuffield and Cannons could not be liable as guarantors.

This argument was also rejected by the Court.  The Court instead held that the licence to assign clearly stated that Nuffield and Cannons would not be released by variations of the lease or by any other matter by which Virgin Active would be exonerated from its obligations under the licence to assign, and that any such release could only be made by way of release under seal given by Oceanfill (which had not happened).

Decision 

The Court held that Oceanfill was entitled to summary judgment against Nuffield and Cannons for arrears under the lease. 

The plan did not alter or compromise the obligations of Nuffield and Cannons under the guarantees.  As such, Nuffield and Cannons were liable to pay the rental arrears to Oceanfill as guarantors.

Comment 

The case is an interesting and important development for restructuring plans and potentially other similar compromise tools, such as schemes of arrangement and CVAs.  It is of particular significance to the UK real estate sector.

In some regards, the judgment can be seen as providing comfort to landlords.  It illustrates, and is a reminder for previous tenants and guarantors, that, depending upon the terms of the restructuring plan and the relevant guarantees, a landlord may still be able to claim for unpaid rent against guarantors even where a restructuring plan compromises the tenant's liability to pay such rent.

Much though will depend upon the terms of the restructuring plan, the ambit of which can be flexed and varied as required, as long as it involves some form of "arrangement or compromise" between the debtor and its creditors.  It is therefore possible that future restructuring plans may seek to compromise a wider range of claims.  This could include liabilities of third party guarantors and any "ricochet claims" that those guarantors could bring against the tenant to recover amounts paid out under their guarantees.  Such "ricochet" claims, if not adequately addressed, could threaten the financial viability of the plan and leave the tenant exposed to liability to its guarantors even though its rental liability to the landlord has been compromised. 

This reinforces the importance for any landlord, tenant and guarantor, who may be either proposing a plan or potentially affected by it, to ensure that they carefully consider its terms and its effect on the rental liabilities under the relevant lease.

Commenting on the case, RPC R&I partner Paul Bagon noted that "commercial landlords were likely to welcome the ruling, particularly since many landlords had viewed the recent trend of restructuring decisions by the Courts to have not been found in their favour." RPC Head of Real Estate Liz Alibhai further commented "it will be interesting to see whether future restructuring plans evolve to try to draw in claims against third parties. Otherwise, as the Court pointed out, there is the potential for "ricochet" claims against the tenant, which could undermine the purpose of the plan."