Virgin Active Case - The Verdict
The High Court in London yesterday ruled in favour of Virgin Active's controversial restructuring plan. This is the second example of the court exercising its discretion to sanction a contested plan which sought to rely on the so called cross-class cram down; and the first to affect landlords.
The case, heard by Mr Justice Snowden (who has received praise for his balanced approach throughout the court process) sets the precedent for plans being used to bind landlords that vote against them.
It comes in the same week as a court rejected an attempt by a group of landlords of retail chain, New Look, to overturn a divisive CVA geared heavily at restructuring the company's lease liabilities.
Virgin Active Case - What is it about?
Like many in the public facing retail, hospitality and leisure sectors, Virgin Active has seen its revenue severely depleted over the last 12 months.
Having found itself on the brink of collapse, the gym chain - which is part-owned by Sir Richard Branson - sought to implement a restructuring plan - a UK court process introduced by the Corporate Insolvency and Governance Act, enacted in June last year, and aimed at struggling debtors looking to reduce and restructure their financial liabilities.
The plan, overseen by Deloitte, has been considered the “test case” for the use of the so-called cross-class cram down to effectively compromise lease liabilities.
The plan was fiercely opposed by a number of affected landlords – amongst them, Aberdeen Standard, British Land and Land Securities – who now face write-off, or deferrals, of the large rent arrears accrued over three consecutive lockdowns; with further measures being imposed in the way of temporary rent reductions and (in some cases) a switch to a turnover based rent model.
Virgin Active Case - Court Rationale
Virgin Active's plan sought to compromise the company's liabilities under more than 60 leases. In order to obtain court sanction, they had to show (i) that at least one class of creditors approved the scheme and (ii) that no class of creditors would be worse off than would be the case in the best alternative outcome (which, in this case, was an administration). The class of secured creditors and landlords in "Class A" both approved the plans whereas landlords in "Classes B-E" did not. Nevertheless, the court was satisfied that no class would be worse off under the plans than they would have been under an administration; and the plan was sanctioned.
Virgin Active Case – Implications
The ruling is not just a victory for Virgin Active, who have maintained that the plan will enable them to save thousands of jobs and emerge from the crisis a “stronger business”; it also sets the tone for distressed corporate tenants coming behind them (NCP being the latest big name to launch a plan).
But it is another dismal defeat for landlords, in a year plagued with falling profits and mounting losses - with the scope for a successful challenge to forced tenant restructuring now looking even more distant.
Taken together with this week's New Look decision (which ultimately decided that unimpaired creditors voting through a CVA against the wishes of impaired creditors - including landlords - was not necessarily unfairly prejudicial to those impaired creditors), this has been a very bad week for landlords in the courts.
Morton Fraser's Commercial Real Estate division has a wealth of experience in dealing with the property aspects of corporate restructuring and insolvency, having worked alongside the wider Restructuring and Insolvency Team on a number of high profile reconstructions and multi asset disposals of stressed and distressed assets.
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