Restructuring plans and guarantor liability under commercial leases

“Cross-class cram down” – an alliterative term coined in the United States which has found its way into English legalese. It refers to a new power introduced by the Corporate Insolvency and Governance Act 2020 (inserted into Part 26A of the Companies Act 2006) which can be exercised in the event of a proposed company restructure by way of compromise or scheme of arrangement. Under Part 26A, courts are able to ‘cram down’ dissenting classes of creditors (and thereby bind them to a restructuring plan) if it is considered that they would be no worse off under the scheme than if the scheme were not sanctioned at all (click here for further information).

As the law is relatively novel, there are still unanswered and untested questions concerning the interplay between the provisions of Part 26A and liability for arrears of rent under a commercial lease. The decision in Oceanfill v Nuffield [1] sheds light on the way in which Part 26A schemes come into legal effect and their effect on third-party rights and liabilities, in this case in the context of a commercial lease.

Background

Oceanfill Limited (“Oceanfill”) owns the freehold of a gym which was let to Nuffield Health Wellbeing Limited (“Nuffield”) in 1998 for a term of 25 years. In 2000 the Lease was assigned to Virgin Active Limited (“VAL”), the current sitting tenant. Nuffield assigned the lease to VAL by way of a licence to assign, for which a guarantee (an AGA) was provided by Nuffield for VAL’s performance under the lease. A further guarantee (a ‘GAGA’) was provided by Cannons Group Limited (“CGL”) for Nuffield’s performance of the terms of the licence to assign.

In May 2020, the court approved a restructuring plan proposed by VAL (the “Plan”) and associated businesses under the new Part 26A mechanism [2]. Under the Plan, Oceanfill was classified a Class D landlord. All of the Class D landlords voted against the Plan but were ‘crammed down’ by the court and the Plan was sanctioned, thereby binding Oceanfill to its terms.

Matters in dispute

The Plan, as it related to Class D landlords and leases, essentially wiped out VAL’s obligations to Oceanfill for rent, service charge, VAT and other costs due under the lease in exchange for an entitlement to a specified return (worth less than 1p in the pound) and a rolling break right. Accordingly, VAL did not pay the rent as originally reserved by the lease which would have fallen due in the third and fourth quarters of 2020/21.

Oceanfill claimed for outstanding rent, VAT, and other costs payable pursuant to the terms of the lease, amounting to £141,255.22 [3].

Nuffield and CGL raised two grounds of defence against the claim for the monies:

• Firstly, they argued that the Plan had the effect of preventing the rent becoming due at all. Their contention was that the Plan essentially re-wrote the terms of the Lease, thereby altering the Lease by consent and laying responsibility with payment to VAL alone.
• The second ground of defence rested on the guarantees provided by Nuffield and CGL, who were bound ‘to pay the rents and observe and perform the covenants’ [4] in the form those covenants exist, as varied, at the relevant time. Their argument was that as VAL was not in arrears nor in breach, neither Nuffield nor Cannons were obliged to remedy the non-payment of rent by VAL.

Decision

Deputy Master Arkush, in his judgement of 15 August 2022, did not agree with either ground of defence as put forward by Nuffield and CGL and ruled that Oceanfill was entitled to judgment on their claim.

On the first ground, the court determined that the Plan did not rewrite the lease: “it is a re-writing only as between the landlord affected by the Plan and the Plan Company. It leaves unaffected the rights of the landlord against third party guarantors.” [5] In other words, the Plan does not erase the liability for rent from the Lease but releases the tenant (and the tenant only) from the liabilities.

On the second ground, the defendants’ arguments were frustrated by other clauses within the licence to assign: there were clear provisions that variations of the lease, or any other matter by which the tenant would be exonerated from its obligations, would not release Nuffield or Cannons. Moreover, any release of Nuffield and/or of Cannons could only be by way of release under seal – of which there had been none.

Consequently, the Judge concluded that the Plan had not affected the rights and liabilities of third parties to the Lease, and that therefore Nuffield and Cannons were liable.

Reflections and Considerations

The decision provides some reassurance for landlords subject to restructuring schemes and perhaps even other similar insolvency regimes, such as CVAs. That restructuring schemes under Part 26A of the Companies Act 2006 operate in the same way as schemes under Part 26 was an “inescapable conclusion”[6] for the Judge; new schemes under Part 26A therefore take effect by operation of law, and do not affect the rights of third parties who are liable for the same debt as the creditor which is subject to the scheme.

Against the backdrop of the present economic situation, landlords should be diligent when considering the conditions of any prospective assignment – such conditions as may be stipulated in the terms of a lease or proffered as part of the assignment process. The case highlights the importance of being forward-thinking, risk averse and ideally procuring guarantees if commercially sensible. Faced with an insolvent tenant with a statutory means to pay limited (or no) rent and an outgoing tenant with no liability to guarantee the performance, the failure to procure a guarantee can be a costly price for landlords to pay.

On the other hand, the case provides a stark reminder for both outgoing tenants and guarantors that in providing AGAs and GAGAs, assignment of a lease does not allow them to walk away from their liabilities in relation to such lease – even in instances where the financial position of the assignee materially changes.

James Nelson is a Solicitor and Ruth Crout is a Paralegal at Sharpe Pritchard LLP.

Sharpe Pritchard’s real estate team offers advice and guidance to landlords and tenants across the full spectrum of property issues. If you would like to discuss your options in connection with any scheme of arrangement, restructuring scheme, lease, guarantee or general rent debts. please contact James Nelson (jnelson@sharpepritchard.co.uk) or on 0207 405 4600 for a free initial consultation.

[1] Oceanfill Limited v Nuffield Health Wellbeing Limited, Cannons Group Limited [2022] EWHC 2178 (Ch)

[2] Re Virgin Active Holdings Ltd [2021] EWHC 1246 (Ch)

[3] per para 6 of Judgement, Oceanfill Limited v Nuffield Health Wellbeing Limited, Cannons Group Limited [2022] EWHC 2178 (Ch)

[4] per para 34 of Judgement, Oceanfill Limited v Nuffield Health Wellbeing Limited, Cannons Group Limited [2022] EWHC 2178 (Ch)

[5] per para 26 of Judgement, Oceanfill Limited v Nuffield Health Wellbeing Limited, Cannons Group Limited [2022] EWHC 2178 (Ch)

[6] per para 25 of Judgement, Oceanfill Limited v Nuffield Health Wellbeing Limited, Cannons Group Limited [2022] EWHC 2178 (Ch)

For further insight and resources on local government legal issues from Sharpe Pritchard, please visit the SharpeEdge page by clicking on the banner below.

This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published. If you would like further advice and assistance in relation to any issue raised in this article, please contact us by telephone or email  enquiries@sharpepritchard.co.uk