Commercial property landlords suffer defeat in recent High Court cases

It is safe to say that commercial landlords have had a torrid time during the COVID-19 pandemic, particularly in bearing the brunt of tenants defaulting on rents. Two recent High Court cases concerning the restructuring plans of New Look and Virgin Active have now piled on further misery for landlords.

New Look entered into an insolvency procedure known as a Company Voluntary Arrangement (CVA) in September last year after the well-known clothing retailer fell into financial difficulties as a result of the pandemic.  The terms of the CVA included, amongst other things, moving its stores onto turnover-based rents and a three-year rent concession period. This meant that some landlords would receive significantly less than what they would normally have received for rent, or in some cases, nothing at all. 

The disgruntled landlords launched a challenge against the CVA with one of the main contentions being that the majority of creditors voting in favour of the CVA were unimpaired, whilst the biggest losers could do very little about it. This was because the senior secured noteholders were permitted to vote on the CVA in respect of the unsecured part of their debt which effectively diluted the landlords' opposition. The Court rejected the landlords’ challenges and placed significant weight on the argument that the landlords would receive far less in an alternative insolvency process, such as an administration. It was also highlighted by the Court that new termination rights were granted to the landlords which allowed them to recover the properties and re-let them if they wished.

Virgin Active is an operator of health clubs which likewise has suffered as a result of the pandemic. The company sought to implement a restructure of its liabilities owed to different classes of creditors using a Part 26A Restructuring Plan (Restructuring Plan). This is a new form of restructuring mechanism introduced by the Corporate Insolvency and Governance Act 2020. The Restructuring Plan included proposals to terminate some underperforming leases and to pay much-reduced rents or no rent for other leases (albeit the forfeiture powers were not removed so landlords could exit the leases and rolling break rights were granted to those landlords who were the worst affected).

The Restructuring Plan did not achieve the 75% threshold of all plan classes in value voting in favour of the proposal for creditor approval which would usually mean that the plan fails. However, following an application to the Court, those classes which did not achieve creditor approval were ‘crammed down’ by the Court (i.e. forced to accept the terms of the plan) under a mechanism called cross-class cram down. This mechanism is one of the distinguishing features of Restructuring Plans compared to CVAs but has only once been used before. The ruling is also significant because it is the first time that the Court has approved a Restructuring Plan with landlord compromises that would most commonly be found in a CVA.  

In both cases the Court approved and sanctioned the restructuring plans in the wake of the challenges. The Court found that the proposed arrangements were neither unfair nor prejudicial to the landlords who had objected.  This shows a clear indication by the Court of promoting the rescue culture above the interests of individual landlords, which is not good news for commercial landlords. The use of the cross-class cram down in the Virgin Active case will also be of particular concern to landlords as it may fuel the interest of using a Restructuring Plan in circumstances where a CVA would otherwise be thwarted by dissenting landlords.  Its popularity as an alternative corporate restructuring process will likely become more apparent in the next few years as we emerge from the pandemic.

If you have any queries in respect of this issue, please speak to our Insolvency Team or Real Estate Team who would be happy to assist.