Oceanfill Ltd v Nuffield Health Wellbeing Ltd and Cannons Group Ltd.  EWHC 2178 (Ch)
A recent decision of the High Court has given helpful clarity on the effects of the UK's restructuring plan procedure on lease agreements and the implications for lease guarantors.
The Virgin Active plan
The case arose from Virgin Active's restructuring plan which was sanctioned in May 2021 (covered here). The restructuring plan procedure was introduced in the UK by the Corporate Insolvency and Governance Act 2020 in the midst of the Covid-19 pandemic (covered here), and is now provided for in Part 26A of the Companies Act 2006. For the first time the Court could sanction a plan for companies in financial difficulties which had been rejected by a class of its creditors (so-called cross class cram-down) if an "in-the-money" class had voted in favour.
This feature of the process opened up the possibility of using a single procedure for a comprehensive restructuring of a company's capital structure, including "out-of-the-money" creditors, where market practice previously had been to combine processes to achieve the same result. Virgin Active was the first debtor to deploy the new plan process to implement a restructuring of its leasehold portfolio, imposing reductions in rent arrears and new rent levels going forward. Such a restructuring has historically required tenants to propose company voluntary arrangements, in which landlords would often form the largest category of creditors, and whose positive vote was required for the arrangement to be approved and implemented. A restructuring plan enabled Virgin Active to implement its restructuring (with court sanction) even though landlords voted against it.
In the Oceanfill case, the claimant was the landlord of a gym in Leeds, originally granted to Nuffield Health Wellbeing Limited in 1998, which was guaranteed by Cannons Group Limited. In 2000, Nuffield assigned the lease to Virgin Active Limited, and guaranteed Virgin Active's performance as tenant to Oceanfill. Cannons likewise gave a guarantee to Oceanfill of Nuffield's obligations. In early 2021, Virgin Active proposed, and obtained sanction for, a restructuring plan to, among other things, restructure its lease liabilities. Oceanfill's lease was categorised as a "Class D Lease" which had the effect of releasing Virgin Active from any obligations to pay rent (including arrears) and other property costs on the lease in return for the "Restructuring Plan Return", which was minimal for Oceanfill.
Oceanfill therefore sought to recover the accrued arrears of rent from Nuffield and Cannons under their respective guarantee agreements. The defendants did initially pay some of the arrears, before taking the position that they were not liable to, which led to the issuance of proceedings and Oceanfill seeking summary judgment.
Deputy Master Arkush granted summary judgment to Oceanfill Limited, entitling the company to claim its arrears under the guarantees from the defendants.
The main question that the judge had to consider was the legal effect of a restructuring plan on the leases it purported to compromise, and whether that amounted to a variation of the lease that would mean that the rent had not fallen due, and therefore could not be claimed under the guarantee agreements. The judge concluded that a Part 26A restructuring plan took effect by operation of law, and did not constitute a deemed agreement between the parties that would vary the underlying lease. In doing so he compared a Part 26A restructuring plan procedure to a Part 26 scheme of arrangement, on which the restructuring plan was modelled. It is well established that a scheme of arrangement takes effect by operation of law and does not affect the rights of third parties (unless expressed to do so), and the judge held that it would be anomalous if the same were not true of restructuring plans. This meant that the plan did not re-write the underling lease, rather it released the tenant company from its liability to pay the rent, even though the rent continued to accrue under the lease. The rights of the landlord against third parties in respect of that rent were therefore unaffected.
The defendants advanced a further argument which was that, based on the wording of the assignment documentation, the guarantees themselves only extended to pay the rent as varied, and because the rent arrears had been released there was consequently no liability under the guarantees. However, the judge relied on the provisions in the agreement that preserved the obligations of the guarantors even where there had been a variation of the lease or release of the tenant to find that the full amount of the rent and other property costs would be due under the lease but for the plan.
While much of the reasoning comes down to an interpretation of the specific terms of the lease, plan and guarantee, this case is positive news for landlords in that it preserves an alternative route to recovery where tenants take the new approach of implementing a restructuring plan rather than the traditional CVA.
Case law on the interaction between leases and CVAs is extensive (albeit far from comprehensive), and this case marks the start of the journey for restructuring plans. Of particular note in this case was the absence of any discussion in the judgment of the CVA process and the large body of case law that has developed in that area – for example it is well established that a CVA does not vary the underlying lease, which can only be done by deed, and that third party guarantees, and the potential ricochet claims, can be compromised if appropriate value is given for that, but that was not raised in the judgment. It was also noteworthy that it seems that the plan itself did not seek to compromise the potential ricochet claims from third party guarantors, as opposed to group company guarantors, which you would typically see in a CVA to ensure that the arrangement was not undermined, and this is a point that landlords should keep a close eye on when considering future restructuring plan and CVA proposals.
It remains to be seen how frequently restructuring plans will be used instead of CVAs to implement restructurings of lease portfolios given the higher associated costs and longer timelines with court involvement. Plans such as that proposed by Houst this year show that they can be used in the mid-market so this will be an area for lenders and landlords to watch going forward.
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