The UK landlords of international serviced office business WeWork may be forced to accept swingeing rent cuts approved by a judge, if the company does not run out of money and fall into a full insolvency, according to insolvency lawyers.
Earlier this month, WeWork chief executive David Tolley published a statement saying the financially troubled firm had kicked off a process with landlords to “renegotiate nearly all our leases” in all the company’s international locations.
“We will seek to negotiate terms with our landlords that allow WeWork to maintain our unmatched quality of service and global network, in financially stable manner,” he said.
“As part of these negotiations, we expect to exit unfit and underperforming locations and to reinvest in our strongest assets as we continuously improve our product.”
He said that in Q2 2023 lease liabilities stood at more than two-thirds of total operating expenses.
Prezzo
While this could be the start of a process of individual negotiation with WeWork’s thousands of landlords, it is more likely to lead, in the UK at least, to a court-approved restructuring plan that results in the cutting of underperforming locations, with remaining landlords being forced to accept significantly reduced terms, according to Alison Goldthorp, a partner at law firm Charles Russell Speechlys.
Specifically, Goldthorp pointed to the restructuring of Italian restaurant chain Prezzo.
“Prezzo retained the profitable restaurants and right-sized the business,” she said. “It was pretty dramatic, but the court approved it because the court compares the plan to what would happen without a plan. And in this case the business would have gone into administration.”
The High Court approved Prezzo’s plan in July, and the business closed a third of its restaurants.
Fitness First
In June, the High Court approved a similar restructuring plan for gym chain Fitness First.
According to court papers, the gym divided its 40 locations into six classes (A, B1, B2, B3, C and D) based on the profitability of the location.
It proposed that landlords of class-A properties would have no changes to their terms. Class-D properties would be vacated, and all other properties would see a decrease in rent of 30-60% for a three-year period.
A group of five landlords, including Lazari Properties and the Crown Estate, opposed the deal, saying they wanted more time for negations. However, the court approved the proposals, saying that the alternative was administration.
Landlords are put in such a position because they are unsecured creditors, meaning they stand to gain nothing if the business falls into administration. Secured and preferential creditors, such as HMRC, are not in the same precarious situation, said Goldthorp.
Even so, the beleaguered business cannot simply dictate terms, said Goldthorp. Lawyers for the company need to present valuation evidence to the court demonstrating what would happen in the case of an administration, and the court needs to be satisfied that the valuation evidence is correct.
That is exactly what has happened in a spate of post-Covid restructurings which were approved by the court despite landlord challenges. So what can the landlords do?
“They have to take a view as to whether or not the evaluation evidence is fair, and then decide whether it is worth incurring the costs to challenge the plan,” said Goldthorp.
There is also another worry about incurring further costs if the business tries to challenge the challenge, she added.
Wilko
The process takes time – and time is money. “If WeWork runs out of money next month, it won’t have time for this,” said Goldthorp.
That was the situation with Wilko, which is currently in administration.
“That is unusual these days,” Goldthorp said. “Usually, you would have negotiations with buyers before going into administration procedures, because you lose a lot of value by going into an insolvency procedure. The better thing is to do is to attempt to keep the business together by trying to negotiate before you actually run out of money.”
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