The thorny issues of Restructuring Plans, “cross class cram down” and CVAs, have probably been dirty words in commercial landlord circles for some time. Landlords would be forgiven for feeling a bit hard done by too. These flexible restructuring tools, whilst hugely beneficial to struggling companies (like tenants), have been perceived as unfairly prejudicial to landlords’ interests. There is a growing scrapheap of authorities of unsuccessful challenges by landlords that arguably support this view from: JJB Sports plc (CVA)(2009), Debenhams (CVA)(2019) right through to recent examples like Deep Ocean (Restructuring Plan)(Jan 2021), New Look (CVA)(May 2021), Regis (CVA)(May 2021) and Virgin Active (Restructuring Plan)(May 2021).
And they are in the news again but for different reasons. Oceanfill  EWHC 2178 (Ch), may be an early sign that the tides are changing (pun intended). This article explores that decision and what it means for landlords.
The Insolvency Service has also taken an interest in this area, commissioning research and analysis to ask whether the perception that landlords are unfairly prejudiced is true. The report was published recently on 28 June 2022 and this article will explore some of the key findings.
This case was a hangover from the Virgin Active restructuring plan sanctioned in May 2021 which had been unsuccessfully challenged by a group of landlords owed approximately £30 million.
In Oceanfill a challenge was brought by way of summary judgment application by Oceanfill (as landlord), against Nuffield Health (the gym chain)(ex-tenant) and against Cannons Group (guarantor) in relation to a gym site in Leeds. Nuffield was the original tenant but had assigned the lease to Virgin Active (VA) in 2000. The assignment agreement provided for Nuffield and Cannons to guarantee and indemnify VA’s obligations under the lease. VA remained tenant for the next 21 years right up to the sanctioning of its restructuring plan in May 2021 (the Plan) where, unsurprisingly, it stopped paying rent and significant arrears had built up.
Pursuant to the Plan, Oceanfill and the Leeds gym lease had been classed as “Class D” i.e. non-essential. Oceanfill and all other Class D landlords had, obviously, voted against the Plan but were crammed down anyway.
The terms of the Plan provided, inter alia: (a) no past, present or future rent or other sums due under the lease would be payable; (b) VA would no longer have any obligations under the lease; (c) all obligations and liabilities were irrevocably and unconditionally compromised, released, discharged and brought to an end with all sums due under the lease reduced to nil; and (d) a waiver/release would be given by Oceanfill for any default under the lease.
The essential question for the court in Oceanfill was what was the legal effect of the Plan as against third parties? Did it solely deal with VA’s liabilities to Oceanfill and, therefore, represent only a limited modification to the lease OR did it have a much wider effect such that the lease was more widely modified to effect third party obligations too? i.e. did it release Nuffield and Cannons from their guarantees?
The court decided in favour of Oceanfill, preferring the former interpretation.
The starting point for reaching that conclusion was to look at the originating law for restructuring plan (Part 26A of the Companies Act 2006). It was clear that Part 26A takes effect as a statutory scheme by operation of law, not by an actual or deemed agreement between the parties. To that extent the sanctioning of the Plan was to release the tenant from liability under the lease, not to re-write the lease. But, even if that was incorrect analysis, if it was re-written, it was solely re-written between the parties to the Plan, VA and Oceanfill. It left unaffected the rights of Oceanfill against third party guarantors who were not parties to the Plan. As between them the lease remained valid and subsisting and rent continued to “fall due” even if not payable by VA.
The court also examined the precise terms of the assignment of lease and held that its terms were clear that Nuffield and Cannons would not be released from their guarantee by any variation to the lease.
The decision represents a small win for some landlords who succeeded on every ground of challenge who may take some comfort from it. It will be interesting to see whether, in practice, commercial terms will be amended or parties’ positions change to reflect the greater risk that these guarantees and indemnities may, one day, be actually called upon.
The Insolvency Service’s investigation into whether landlords are, actually, inequitably treated under the CVA regime makes for some interesting reading. The three questions posed were:
- How do outcomes for landlords in large business CVAs from either the Retail trade, Accommodation or Food and beverage service activity compare to other creditors?
- Are landlords equitably treated, compared to other creditors, in large business CVAs from either the Retail trade, Accommodation or Food and beverage service activity?
- If such a finding is made, to identify what specific levers in the framework are causing the issue and how.
It is important to highlight the limitations and caveats before drawing too wide a conclusion. The dataset used covered companies that had proposed CVAs between 2011-2020 but that pool was then whittled down to only 59 companies as it was filtered, first, by SIC code (only those companies with a SIC code for retail trade, accommodation or food/beverage) and then only large companies were used (defined as: >250 employees + turnover >£10.2m). Further, the nature of CVAs means that, unless an interested party, it can be difficult to get disclosure of the underlying proposal to properly analyse its terms and no two proposals are ever the same.
The key takeaways from the report are:
- Landlords were compromised in 93% of cases (by amending the rent payable). The next significantly compromised class of creditors were intercompany creditors in 53% of cases. So, some evidence landlords were more prejudiced than others.
- However, the level of compromise, for landlords (Cat B-D) ranges from 46% to 85%. This compared favourably with compromise given to the other key categories of creditor (Intercompany 81%, Local Authorities 82%, non-critical trade creditors 88% and HMRC 89%). So, no evidence of unfair prejudice here.
- The average level of compromise for all landlords is 43% (average across all landlords, including those whose debts were not compromised). This compares with the average level of compromise given to other key categories of creditor (Intercompany 48%, Local Authorities 39%, non-critical trade creditors 44% and HMRC 23%). So, no evidence of unfair prejudice here.
- Common topics of compromises in CVAs like: moving to a calculation of rent based on the annual turnover of the tenant or arrears of rent, service charges and dilapidations were not assessed. Had they been it may have indicated a higher level of prejudice to landlords compared to others.
- Landlords are, broadly, equitably treated compared to other classes of unsecured creditors;
- CVAs had two important checks and balances to prevent prejudice: first, the appointment of a nominee to oversee the proposals (who must be a regulated licenced IP). The report did recognise though that there may be a “perceived” lack of independence from the directors here given the IPs are often heavily involved in drafting the proposals and, therefore, pre-CVA advisory role. Second, the proposals must be voted on and approved by 75% in value of all creditors + a second vote of 50%+ of unconnected creditors voting in favour. They are only approved and implemented following a vote in favour.
- Landlords typically have larger claims than other creditors and, therefore, larger voting power;
- CVAs cannot alter a landlord’s proprietary rights of re-entry and it is a standard clause in many commercial leases to allow for repossession on the triggering of an insolvency event (like a CVA proposal) to protect landlords.
- Landlords can challenge CVAs through the court procedure provided in statute;
- CVAs have to include an estimate outcome of the CVA versus the relevant alternative (usually a CVL). In all 59 cases landlords (and all creditors) fared much better under a CVA than the alternative.
- Broadly, landlords were found to be equitably treated but there was a recognition that proposals were often too long and complicated. This could lead to confusion which fed into the idea of prejudice. A call for greater clarity was needed.
The overall conclusion that landlords are not prejudiced but equitably treated is perhaps a surprising one for many given the historic case law. That said, bad news tends to capture the headlines more so this might well be the reason for that perception and, in truth, there have been limited successes to shout about. It is, however, important not to lose sight of the limitations of this analysis. It analysed only 59 CVAs in a very limited field so it may be that had they analysed CVAs in other industries the prejudice would be greater or is greater in small to medium enterprises. As the report comments, key areas of contention in commercial leases were not analysed e.g. amending the basis of rent calculations, dilapidation claims, and rent arrears. It is not all about the rent payable (or not) in the CVA period.
Some of the supporting reasons for finding lack of prejudice also, in my view, miss the mark and lack in commercial reality. For example, though commercial landlords may technically have rights of re-entry and repossession triggered by insolvency events, in reality, in these specific sectors, how many landlords are genuinely going to benefit from doing so? The “High Street is dead” is a phrase widely published in the last decade and rings truer in the post-pandemic world. Landlords exercising self-help are more likely to end up either with leases on less advantageous terms (including generous rent-free periods) or, worse, left with an empty property they cannot rent and all the costs that that entails (rates liability, insurance/security costs etc). The protection of a court challenge is also overstated; in reality, they are prohibitively expensive and risky for landlords and unless the process is reformed unlikely to be a route it is advisable to pursue in a lot of cases.