Pandemic rents, CVAs and restructuring plans
It’s been a busy few weeks for commercial tenants and their landlords – not only due to the re-opening of non-essential retail and hospitality, but with court decisions on commercial rents and the restructuring of commercial leases coming thick and fast: particularly in the retail, hospitality and leisure sector.
At first, the interests of landlords appeared to be in the ascendancy, with two separate victories in April 2021 for commercial landlords in relation to the payment of COVID-19 rent (Commerz Real v TFS Stores, and Bank of New York Mellon v Cine-UK).
However, the needle may now have swung back in favour of tenants following the decisions last week (the start of May 2021) in relation to both the New Look CVA (company voluntary arrangement), and the Virgin Active Restructuring Plan, as well as a further judgment this week in relation to the Regis & Supercuts CVA. The New Look landlords have also now been given permission to appeal (and the Virgin Active sanction is so recent, that it could still be appealed as well).
Before all of this, the scene had been set at the start of April 2021, with the government’s call for evidence regarding how to deal with commercial rent arrears arising from the COVID-19 pandemic (see our previous article, here).
So where does this leave landlords and tenants?
Two nil to the landlords
In Commerz Real v TFS Stores (concerned with Westfield London), the tenant ran three arguments:
- (i) that the Code of Practice for Commercial Property Relationships during the COVID-19 Pandemic, which was introduced by the government, rendered a claim for rent arrears premature;
- (ii) that bringing a debt claim in relation to rent arrears exploited a loop hole in all of the other restrictions and moratoriums introduced by the government; and
- (iii) that the rent arrears should be caught by the landlord’s insurance policy. All of these arguments were roundly rejected, and the landlord obtained Summary Judgment requiring payment of the arrears.
This position was supported by the subsequent judgment in relation to Cine-UK, where similar arguments relating to the Code of Practice and landlord insurance were raised and dismissed. The tenant also advanced arguments in relation to the ‘rent cesser’ clause in its lease, as well as implied terms and temporary frustration, and argued that lease obligations should be suspended as a result of government restrictions. Again, all of these arguments were rejected.
There are a number of similar cases still before the courts in relation to ‘Covid rent’, which may now follow the TFS and Cine-UK decisions (although the position may of course change / develop further, if those other cases raise different arguments, or have different underlying facts).
Victories for tenants: New Look and Virgin Active
A decision in relation to the New Look CVA had been awaited for some time, as certain of New Look’s landlords had challenged the CVA in October 2020. In common with many ‘Retail CVAs’, the New Look CVA put properties and landlords into different groups, with some retaining existing rent arrangements, some having rent reduced, and others reset to turnover rents. Some landlords challenged these arrangements, on the basis that:
- (i) such an approach went beyond the permitted scope of a CVA (the jurisdictional challenge);
- (ii) that there were material irregularities with the New Look CVA,; and
- (iii) that it unfairly prejudiced certain landlords.
All of these arguments were rejected by the court, but with the Judge (Mr Justice Zacarolli) providing a detailed explanation of the considerations taken into account when considering whether or not a CVA is fair – ultimately, (as has been demonstrated in previous cases), the test remains whether or not the CVA will lead to a better outcome for creditors, than an alternative (such as an administration or winding up). Further, because New Look leases remained in place unless and until terminated by landlords, the landlords’ proprietary rights had not been compromised (a point that was previously established in the challenge to the Debenhams CVA). However, the landlords have subsequently been given permission to appeal in relation to a number of areas – including rent and future rent reductions, so there may yet be more to come.
The Virgin Active Restructuring Plan
However, last week also saw the court sanction the Virgin Active Restructuring Plan. The Restructuring Plan procedure was introduced last year, and is similar to both CVAs and Schemes of Arrangement – although unlike a CVA, they require approval from the court, and the creditor voting process is different. Indeed, if approval is given by the court, then a Restructuring Plan can proceed even if there is insufficient creditor support. The specifics of the process are outside the scope of this note, but involve the ‘cross class cramdown’ approach, to allow the court to approve Restructuring Plans. Since their introduction last year, only a handful of Restructuring Plans have made their way through the courts – and prior to Virgin Active, they had not been targeted primarily at lease liabilities (Pizza Express did obtain plan approval, but in relation to finance obligations).
As such, the Virgin Active gym chain is the first time that a Restructuring Plan has sought to compromise landlord claims in order to re-gear a company’s leases. This meant that, prior to the judgment and sanction being given, there had already been two related court hearings – firstly when the Virgin Active Restructuring Plan was launched, and another in relation to one of Virgin Active’s landlords claim for judgment for rent arrears, as referred to here.
At the initial convening court hearing in March 2021, when Virgin Active launched its Plan, four of the group’s landlords raised objections in relation to the various creditor classes that were being proposed, with the court being told that a further seven landlords also had concerns. Whilst some of the landlords’ objections were taken on board at that initial stage, it did not derail the process – which finally culminated in the court approving the plan last week. As such, Restructuring Plans may now be used in place of CVAs in certain circumstances – particularly if the distressed tenant company has a number of leases, can demonstrate that a Restructuring Plan will be better for creditors than any other alternative, but where the tenant company may not be certain of obtaining the 75% creditor approval required for a CVA.
Following on the heels of the above, Mr Justice Zacarolli has now also given judgment in relation to the Regis CVA, in a decision that could be seen as both a good and bad thing for landlords. The CVA in question had actually terminated some time ago (late 2019), but certain landlords had sought an Order that the CVA should be revoked and that the nominees and supervisors of the CVA should repay their fees, on the basis that there had been unfair prejudice and / or material irregularity when the CVA was drawn up and approved. As such, similar arguments were advanced to those also considered by Mr Justice Zacarolli in the New Look CVA, as above. Unfortunately for landlords – but unsurprisingly given the above – all but one of the arguments about unfair prejudice and material irregularity were rejected. As a result, there was no order to repay nominee and supervisor fees – even though the CVA was formally revoked by the court (despite having previously terminated in any event).
The only argument that succeeded, and which led to revocation of the CVA, concerned the incorrect treatment of one creditor as a critical creditor: this was considered to be unfairly prejudicial, although all other unfair prejudice and material irregularity grounds were rejected: not least because many had already been considered and therefore fell away in light of the New Look judgment. One particular area of challenge which was rejected (but which is worth noting), concerned a failure – within the CVA proposals – to disclose certain transactions from 2017 and 2018 that might have been open to challenge by a subsequently appointed liquidator or administrator. As such, it had been argued that these potential claims could have affected the relevant alternatives to the CVA (liquidation or administration). However, on the facts of the Regis case, these arguments did not amount to material irregularity. Ultimately, despite the CVA being revoked, the Judgment did not provide the victory against CVAs that landlords had hoped for.
Whilst the landlords ‘won’ in relation to COVID-19 rent (and partially in relation to the Regis CVA), the decisions in New Look, Virgin Active and Regis, mean that the use of CVAs – and now Restructuring Plans as well – to regear tenant property portfolios may continue, and may even increase as the next rent quarter date and the end of the Covid-related moratoriums on enforcement loom. That is not to say that CVAs and Restructuring Plans provide carte blanche for tenants to avoid or reduce their liabilities, as these processes will still be subject to scrutiny and, potentially, to challenge if landlords (or other affected creditors) can satisfy the tests of unfair prejudice or material irregularity. However, the scope and extent of those tests are now more clearly defined than ever.
Ultimately, if a proposed CVA or Restructuring Plan will leave the landlord in a better position than it would be in an administration or liquidation, even if it does involve a drastic reduction in the rent, then that has to be best for all involved. The problem, of course, and potentially the next area of dispute / challenge, will be ascertaining whether or not the comparable outcome (ie administration or liquidation) is accepted as being accurate.
However, a CVA or Restructuring Plan will simply not be appropriate for many businesses and tenants who are carrying substantial rent arrear debts, as a result of enforced Covid closures. Whilst some clarity may be provided when the Government publishes its response to the commercial rents consultation, it is extremely unlikely that these rent burdens will be removed. In those respects, taking early advice on their options is the best thing that can be done by business directors and owners with large rent debts, in order to minimise liabilities and preserve value.