The High Court has upheld a claim for rent against guarantors following the approval of a restructuring plan which provided that the tenant would not pay any rent under its current leases in Oceanfill Ltd v Nuffield Health Wellbeing Ltd and another [2022] EWHC 2178 (Ch); [2022] PLSCS 139.
The claimant owned Centaur House in Leeds, the ground and lower ground floors of which were let in 1998 for a 25-year term to the first defendant for use as a gym. The second defendant guaranteed the first defendant’s performance of its obligations under the lease. In 2000, the first defendant assigned the lease to Virgin Active Ltd and entered into an authorised guarantee agreement (AGA) guaranteeing Virgin’s performance under the lease. The second defendant guaranteed the first defendant’s obligations under the AGA (the GAGA).
In May 2021, the High Court approved a restructuring plan proposed by Virgin and associated companies under Part 26A of the Companies Act 2006: Re Virgin Active Holdings Ltd [2021] EWCH 1246 (Ch). The effect of the plan on landlords such as the claimant – who all voted against the plan – was that no past, present or future rent or other liabilities would be payable by the plan companies under their leases. Instead, they had the benefit of a rolling break right and were entitled to a return under the plan which, in the claimant’s case, was less than 1p in the pound. The claimant sought arrears of more than £141,000 from the defendants as guarantors.
Part 26A of the 2006 Act came into effect on 26 June 2020, as a result of the coronavirus pandemic. It introduced an additional power, a “cross-class cram down”, whereby the court can bind dissenting creditors to a restructuring plan provided that they would be no worse off under the restructuring plan than under the alternative outcome if the plan was not agreed.
The court decided that the restructuring plan had not varied the lease and released Virgin from liability so that the sums due from the defendants had not fallen due. The plan had merely altered Virgin’s liabilities under the lease by operation of law, leaving the liabilities of the defendants unaffected. The parity of language between Part 26 and Part 26A led to the inescapable conclusion that the provisions were intended to operate in the same way. They take effect by operation of law and therefore do not affect the rights of third parties liable for the same debt as the creditor which is subject to the scheme.
The defendants’ argument, that because of the restructuring plan no rent was payable by Virgin and therefore there was no breach of the obligation in the AGA that Virgin would “pay the rents and observe and perform its covenants in the lease”, failed. The licence to assign expressly stated that the defendants’ obligations would not be released by any variation of the lease or any other act or thing save a release by the landlord under seal. The restructuring plan did not operate as such a release and so the claimant was entitled to summary judgment on its claim.
Louise Clark is a property law consultant and mediator
