Restructuring Plans: No Way Out for Guarantors?

Many landlords will have experienced the unfortunate situation of a tenant being unable to pay its rent. Where a tenant faces significant financial hardship, some form of restructuring is often the inevitable outcome.

Landlords of such tenants can feel unfairly prejudiced as CVAs or Restructuring Plans dictate the amount of rent they are likely to receive. They often include mechanisms for tenants to exit onerous leases or escape liability for dilapidations.

Oceanfill Ltd v Nuffield Health Wellbeing Ltd and Cannons Groups Ltd [2022] EWHC 2178 (Ch)

In this case the Court considered the impact of a Restructuring Plan under Part 26A Companies Act 2006 on recovery from third parties, such as guarantors.

Background

The claim was brought by the landlord, Oceanfill. This was for unpaid rent and other sums in excess of £140,000 against the original tenant, Nuffield, and its guarantor, Cannons.

Oceanfill was the landlord of a 25 year lease of a gym in Leeds. In around 2000, Nuffield assigned the lease to Virgin Active Limited. As part of the assignment Nuffield guaranteed Virgin’s obligations under the lease (“the AGA”) and Cannons provided a guarantee of Nuffield’s obligations (“the GAGA”). In 2021 Virgin entered into a restructuring plan, under which its liability under the lease (including the obligation to pay rent, service charge and other liabilities) was released. Oceanfill therefore pursued Nuffield and Cannons under the AGA and GAGA for recovery of these sums.

The Defendants’ arguments

1. The restructuring plan had the effect of re-writing the terms of the lease so that the sums claimed were not in fact due.
2. There was no breach of the Defendants’ obligations under the respective AGA and GAGA because the variation to the lease by the restructuring plan altering rent to nil also released them from liability to pay the sums.

This prompted an application for summary judgment by Oceanfill.

The Court’s decision

The Court found in favour of the landlord and awarded summary judgment against the Defendants.  The following points are of note:

1. The Court disagreed that the restructuring plan had ‘re-written the lease’. The correct analysis in the Court’s view, was that the restructuring plan simply altered Virgin’s liability under the lease but the liabilities of Nuffield and Cannons under their respective AGA and GAGA were unchanged. The Court reiterated that such restructuring plans take effect by operation of law and do not affect third parties liable for the same debt.
2. The Defendants’ argument that there were no sums due under the lease and therefore none were due under the AGA and GAGA either was also rejected. The Licence assigning the lease to Virgin was clear in stating Nuffield and Cannons obligations would not be released if there was a variation of the lease or ‘any other act’ save for a release given directly by the landlord. The restructuring plan did not act as such a release by Oceanfill for third party obligations.

Key points to remember about restructuring plans

Restructuring plans have led to concern amongst landlords about ‘cross class cram downs’. This forces them to accept much reduced or nil rent even where they voted against such plans.

For any landlords in a similar situation, it is worth exploring alternative routes and title deeds to maximise recovery.  Landlords will take some reassurance that the ability to pursue guarantors cannot be done away with if a new tenant enters a restructuring plan.

Another possibility alluded to in this claim was that guarantors could look to subsequently claim against assignee tenants in ‘ricochet’ claims, which raises questions about whether restructuring plans adequately protect tenants from claims by guarantors. It has yet to be seen whether such claims would be successful or if future restructuring plans are drafted more carefully with this in mind.

For more information, get in touch with a member of our property disputes team today who can assist you.