A Further Blow To The Landlords? The Virgin Active Case And The New Restructuring Plan Regime

• Published date: 01 June 2021
• Subject Matter: Corporate/Commercial Law, Real Estate and Construction, Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Corporate and Company Law, Landlord & Tenant - Leases
• Law Firm: Cadwalader, Wickersham & Taft LLP
• Author: Mr Duncan Hubbard and Livia Li

It's not news that the COVID-19 pandemic has exacerbated losses in sectors that are reliant on footfall − namely, the retail and leisure industry. Prior to the pandemic, the general weakness in the "bricks and mortar" retail industry has given rise to a series of company voluntary arrangements, and companies struggling to meet fixed rent have used CVA as a tool to renegotiate reductions for fixed rent leases, and in some cases, completely overhauling the fixed rent to turnover-based measurements. Due to the pandemic, along with measures announced by the Government on a stop on forfeiture over non-payment of rent, it wouldn't be uncommon for businesses to be sitting on a debt pile of unpaid rent arrears since March 2020.

Last week, the High Court handed down a momentous judgment on a rescuing plan presented by Virgin Active which relies on wiping out the majority of the rent arrears. It was a test case on the new rules around scheme of arrangement introduced last year, which no longer requires 75% votes from all creditors to be obtained, provided certain conditions are met.

This article revisits the current rules around pre-insolvency restructuring and how this could affect landlords, as well as the implications of the Virgin Active case.

The Rise and Rise of CVA

Until last year, tenants who are not yet insolvent but are nevertheless struggling with cash flow pressures have looked at company voluntary arrangements ("CVA"), which is a procedure undertaken between a company and its creditors under Part I of the Insolvency Act 1986 ("IA 1986"). The CVA is not a formal insolvency arrangement, but is a tool companies could use in restructuring their unsecured debts.

CVA does not compromise claims of secured creditors and only involves unsecured creditors (such as landlords) and, amongst other criteria, once passed by 75% of all unsecured creditors (measured by value of the aggregate debt) the arrangement binds all unsecured creditors. Due to the recent decline in the retail sector, which was exacerbated by the pandemic, companies in the retail industry have been increasingly using this strategy as a tool to renegotiate rent reductions and/or write-offs of rent arrears with landlords. Recent examples include the New Look CVA, where the CVA included moving rents to turnover rents and 3-year rent concession periods.

For more discussion on the use of CVA and how this could affect landlords, please see our earlier article here.

New Rules for Scheme of...