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Case analysis on New Look and Virgin cases

Posted on 6 September 2021

The COVID-19 pandemic has been hugely challenging for both landlords and tenants. While certain restrictions, including a moratorium on commercial rents, have been brought in to try to soften the blow for tenants, support for landlords has been more limited.

In the context of tenant insolvency, the courts have dealt further disappointment to landlords in recent high profile decisions in the retail and leisure sectors.

The New Look case involved a root and branch challenge to the jurisdiction of company voluntary arrangements (CVAs). It examined the issue that the votes of landlords can be swamped by the votes of creditors who are not affected, leaving landlords to 'take all the pain'. The court thoroughly considered the issues, but found squarely in favour of the tenant and approved the CVA.

In the Regis case, landlords brought an unfair prejudice challenge to a CVA that failed on all but one discrete ground (which is unlikely to apply in other cases).

Perhaps most significant is the decision of the High Court in the Virgin Active case to approve a restructuring plan (a Part 26A plan). This was the first time the new restructuring plan process had been used to compromise landlords' claims, in addition to other liabilities.

The key feature of the restructuring plan process is that it is a court-supervised process, where the court has the discretion to "cram down" dissenting classes of creditors. The court can do this if it is satisfied that one class of creditors voted for the plan (by 75%) and that the creditors would be "no worse off" in the relevant alternative. In the Virgin Active case, the Court found it most likely to be administration.

The court exercised its discretion to cram down the dissenting classes of creditors, despite the  majority of the classes, many of which comprised of landlords due to suffer significant losses of rent, voting against the plan. A group of dissenting landlord creditors challenged the plan, but the judge found (on the evidence before him) that the landlords would be no worse off if the plan were approved, than if the Virgin Active group went into administration.

The court also gave considerable thought to the position of what it called the "out of the money" creditors (i.e. creditors who would not recover their debts in the relevant alternative, administration, but would likely only receive a very small share of the distributed assets).

The court found that the vote of "out of the money" creditors who voted against the plan, should be given little weight in the decision, especially if it is not known why they dissented. Notably, the legislation does provide for those "out of the money" creditors to be excluded from the voting process.

We expect to see this process being used more often by larger tenant entities. Whilst it is more expensive for the tenant to follow the court process than to seek to enter into a CVA, it provides the tenant with certainty once the plan has been approved. This is in contrast to the position in relation to CVAs where a pending court challenge can destabilise the tenant's recovery.

The key point to note is that each restructuring plan will be considered on its own merits and based on the evidence before the court. The only valuation evidence before the court about the position that the creditors would be in if the Virgin Active group went into administration was put forward by Virgin Active. Whilst the landlords challenged that evidence, none had put forward any contrary evidence of their own.

Given the support that courts have shown to tenants seeking to be rescued by CVAs and restructuring plans, in addition to the financial difficulties faced by many high street tenants, we can expect to see more of them in the coming months. Despite the courts’ recent decisions, landlords will still be looking for ways to bring a successful challenge.

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