Approaching restructuring plans as a landlord in the UK retail and consumer sector
Published on 10th Oct 2023
Early engagement, targeted information requests and use of the court's disclosure powers may assist consideration of whether to support or oppose a plan
Since their introduction in 2020, restructuring plans have become increasingly common in the retail and consumer sectors, including fitness centres (Virgin Active and Fitness First), casual dining (Prezzo) and, most recently, in greeting cards and gifting (Clintons).
One factor which these plans have in common is that they have successfully compromised liabilities owed to landlords. The common rationale for this approach is that the plan company has leases in unprofitable locations, such that it seeks to reduce rent down to a rate which the plan company considers would enable the sites to be profitable, or to bring the lease to an early end.
This approach has been subject to challenge by certain landlords, who feel aggrieved at being a regular target of compromise arrangements, and at being crammed down despite their objection to the plans. Under a company voluntary arrangement (historically the restructuring tool most frequently used to compromise landlord liabilities) there is no cross-class cram down mechanism, and so landlords, at least in some cases, had more success in rebuffing one.
Restructuring plan decisions to date provide some helpful guidance to landlords who may be affected by a proposed plan.
Lack of engagement
A common criticism made by landlords has been the failure of the plan company to engage properly with them until a very late stage (or at all). This has resulted in landlords having little opportunity to respond or seek further information before the process is commenced.
The reasons given for late engagement have included landlords being "out of the money" (where they are likely to receive nothing in the relevant alternative), or due to the urgency of the company's funding position.
The court is cognisant of this complaint, and has recommended that landlords seek the information they need as soon as they are able to do so, and to make use of the court's power to order disclosure, where necessary.
Targeted information requests
Where a plan company engages with its landlords at a late stage, landlords have been encouraged to do their best, and carefully consider what information they need to make an informed decision.
Landlords should bear in mind that retail and consumer companies will be focused on the profitability of their locations. Locations are likely be grouped into different classes which are considered to be of a similar level of profitability (or lack thereof) (a common categorisation is red, amber, green). Often, less profitable locations will find that the plan is less generous than for profitable ones (or those which are for other reasons considered critical for the business).
Where the proposed plan affects a number of creditors, it is likely that the plan company may be inundated with information requests. Careful consideration should be given to making targeted information requests which allow the landlord to make a decision as to whether to support or oppose the plan (and/or set out the grounds on which the plan is opposed).
This approach will more likely to elicit a useful response, rather than catch-all requests that can take significant time to deal with and/or do not result in information being provided with a sufficient level of detail, thus causing delay and further cost to the landlord.
Certain information may be commercially sensitive, and a non-disclosure agreement may need to be entered into.
Court disclosure powers
If a landlord has been met with resistance (or a lack of response) on the information it needs to make an informed decision on the plan, the court has the power to order the plan company to disclose it.
Disclosure requests should be targeted at the specific information necessary for the landlord to make an informed decision on the plan.
Where it is necessary to obtain a disclosure order, the court has encouraged landlords to make the application as soon as possible, so that the landlord receives, and has time to given proper consideration to, the relevant information.
Making a decision
In making a decision as to whether to support or oppose the restructuring plan, landlords will be focused on their outcome both in the relevant alternative, and under the plan.
Landlords must be left in a position that they are "no worse off" under the plan than in the relevant alternative. If there is evidence that one or more classes are worse off, landlords within those classes may wish to oppose the plan.
Consideration should be given to all incidents of the landlord's position, including the amount it would receive under the relevant alternative, the timing of payments, and any other rights (such as against third party guarantors or otherwise) which would be affected.
Finally, where a particular landlord has sites in more than one class, the court will expect it to consider the plan from the perspective of each individual class. The test is whether the plan is one which the landlord could reasonably approve on a class-by-class basis.
How do I oppose a plan that I do not agree with?
Our previous Insight sets out the process which a restructuring plan will need to follow. It is often possible for objections to be raised throughout the process, although they should be raised at the earliest possible stage, so that the relevant landlord (or their class) can engage with the company and see whether a satisfactory solution can be found for all parties.
The court may also be able to direct that further information be provided by the plan company between the convening and sanction hearings. It will also take into account whether the plan company has sought to engage with creditor classes that have a genuine economic interest as part of its consideration of whether to sanction the plan.
If for any reason there has been a delay in the plan company engaging with landlords (including by them being thought to be out of the money or due to an imminent funding deadline), such that further time is needed for an informed decision to be made after the convening hearing, the court has commonly been content to deal with objections at the sanction hearing.
To the extent landlords are in fact out of the money under the relevant alternative, the court is likely to attach little weight to their views. If, however, the evidence demonstrates that a class would in fact be worse off under the plan than in the relevant alternative, the court should take account of those views when considering whether to sanction the plan.
What does the company need to do to cram down dissenting landlords?
If the requisite majority of landlords within one or more classes object to the plan, the court may only sanction the plan if the plan company has satisfied the court that:
- If the plan is sanctioned, none of the members of any dissenting class would be any worse off than under the relevant alternative.
- The plan has been approved by at least one class of creditors who would receive payment or who have a genuine economic interest in the relevant alternative.
- There are no other reasons that mean the court should not exercise its discretion to sanction the plan. (The court's general discretion has been considered in detail in one of our previous Insights).
Osborne Clarke comment
As a common target of compromise arrangements, it appears likely that landlords will continue to be actively involved in holding plan companies to account, and challenging plans which they consider do not meet the statutory conditions.
Landlords should bear in mind that a plan company will consider the company's position from a portfolio-wide perspective, rather than a site-by-site basis. However, early engagement (where possible), targeted information requests and use (where appropriate) of the court's disclosure powers can put landlords in an informed position on whether to support or oppose the plan.
This article is part of Osborne Clarke's restructuring plan series, which explores the key developments affecting restructuring plans and the developing body of case law in this area.