Real estate

Gym tenant and guarantor held liable for rent despite restructuring plan

Published on 25th Aug 2022

UK judgment is a prompt for landlords to consider all angles to maximise rent recovery in harsh economic conditions

The UK High Court has ruled in favour of a landlord whose original tenant and guarantor were held liable for the rent accrued on a gym in Leeds despite the subsequent assignee operating under a restructuring plan.

The case of Oceanfill Ltd v Nuffield Health Wellbeing Ltd & Cannons Group Limited concerned whether or not a restructuring plan under part 26A of the Companies Act 2006 had the effect of releasing third-party guarantors from liability arising under an authorised guarantee agreement and guarantee entered into when the lease was first assigned.

The landlord Oceanfill was successful in arguing that the original tenant Nuffield and guarantor Cannons remained liable for the guaranteed rent despite a High Court sanction in 2021 of a restructuring plan sought by their assignee Virgin Active.

In anticipation of deteriorating economic conditions and a looming potential recession, landlords should be reviewing their enforcement options, the provisions in leases and authorised guarantee agreements to try and maximise their chances of recovery of rent arrears from financially distressed or insolvent parties. Landlords should also be aware of the risk of being "crammed down" in a restructuring plan.

Dispute background

The claimant, Oceanfill, is the landlord of a gym in Leeds, which had been leased to the defendant, Nuffield, for 25 years, with the joint defendant, Cannons, as the original guarantor. In 2000, the lease was assigned by Nuffield to Virgin. Under the licence to assign, Nuffield guaranteed the performance of Virgin under the terms of the lease. The licence also provided that Cannons guaranteed the performance of Nuffield of its obligations arising under the licence.

In May 2021, the High Court sanctioned a restructuring plan for Virgin and other companies in its group (as the plan companies) pursuant to part 26A of the Act. Oceanfill was a "class D landlord" and the lease was a "class D lease" under the plan, which meant that no past, present or future rent, service charge or other liabilities would be payable by the plan companies under their leases. Instead, Oceanfill would be entitled to a restructuring plan return (a lump sum payment) which would be significantly less than the agreed rent, service charge and other liabilities.

All of the class D landlords had voted against the restructuring plan, but the court sanctioned it anyway, applying a "cross-class cram down" feature under part 26A of the Act that allows dissenting classes of creditors to be bound where the court is satisfied that they would be no worse off than in the relevant alternative.

After the restructuring plan was sanctioned, Oceanfill issued proceedings, applying for summary judgment, seeking payment from Nuffield and Cannons under the guarantees and indemnities provided in the licence to assign. The arrears comprised of rent and additional sums for legal costs and disbursements payable under the lease and the total claimed was £141,255,22

Grounds of defence

Oceanfill argued that Nuffield and Cannons remained liable for the sums reserved by the lease despite the terms of the restructuring plan. Nuffield and Cannons contended that they were not liable, as the restructuring plan varied the terms of the lease, replacing the rent with a restructuring plan return that was Virgin's responsibility to pay and not theirs. The defendants put forward their defence on two grounds:

  • Restructuring plans. The plan varied or rewrote the terms of the lease and released Virgin from liability for rent and other sums due, so that the sums claimed by Oceanfill against them had not fallen due.
  • Obligations in the licence. The defendants had been released by variations to the lease in respect of their obligations under the licence to pay rents and observe and perform the covenants.

Landlord's favour

The court rejected both defences and ruled that Oceanfill was entitled to judgment on the claim. On the two main elements to the defence, it decided as follows:

  • A scheme under part 26A of the Act takes effect as a statutory scheme by operation of law that releases or discharges the tenant from liability. The plan did not rewrite the lease, rather, it effected a compromise between the tenant and the landlord; or, to the extent that it did rewrite the lease, it did so only between the landlord and the tenant. The restructuring plan did not alter or compromise Oceanfill's rights against third-party guarantors (the defendants).
  • The licence contained a clear provision that Nuffield and Cannons would not be released by variations of the lease, or by "any other matter… by which the [t]enant would be exonerated either wholly or in part from its obligations" under the licence, as any release could only be under seal given by Oceanfill. There had been no release under seal. This part of the defence, therefore, failed by reason of clear contractual terms between the parties.

Osborne Clarke comment

In the current economic climate, we are likely to see an increase in the number of restructuring plans being proposed and using the cross-class-cram down feature. This case is a timely reminder to landlords to consider carefully these proposals and whether former tenants or third-party guarantors who will not be released are available as a means of circumventing a restructuring plan to recover rent (and other sums reserved by the lease) in full.

The judgment does flag the possibility of potential "ricochet claims" against tenants when the guarantors have discharged guaranteed claims. In this case, the restructuring plan did not compromise "ricochet claims". The judge commented: "whether this was deliberate, because of their restricted amounts or otherwise, or inadvertent due to the point being missed, or because no-one thought about them, seems to me not to matter". However, it would be possible to do so under a carefully drafted restructuring plan.

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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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