As the economic markets continue to face difficulties, we are starting to see more and more organisations, many of whom are business tenants with a considerable number of leases, begin to default and seek to renegotiate their liabilities under leases through direct discussions, or seek to restructure their debts via a restructuring plan or a Company Voluntary Arrangement (CVA).
One such organisation is Fitness First Clubs Limited ("Fitness First"), the company which operates the well-known Fitness First group of gyms across the UK Group. It was well documented in the press that Fitness First was seeking to restructure its debts and the matter finally came before the High Court on 29 June 2023. In approving the restructuring deal, the High Court dismissed two separate challenges by dissenting landlord creditors, whose claims for sums owed under their leases would be compromised by the plan.
In reaching its decision, the Court relied on the 'cross-class cram down power', being a power to impose a restructuring plan on dissenting creditors, to impose Fitness First's restructuring plan on the creditors that voted against the plan, being landlords of premises occupied by Fitness First.
The landlords' objection to the plan was advanced on two grounds:
(1) The satisfaction of the "no worse off test" under the Companies Act 2006; and
(2) Whether it was appropriate for the Court to exercise its general discretion to approve Fitness First's proposed plan.
In respect of the first objection ("no worse off test"), the Court accepted Fitness First's position that it had correctly identified the relevant alternative under the Act for the purpose of deciding whether the dissenting landlords were no worse off under the plan and the comparison was to an administration with an accelerated M&A process, leading to a pre-pack sale. Finding against the dissenting landlords, the Court rejected their argument that Fitness First could survive outside a formal insolvency process and had failed to prove otherwise.
In respect of the second objection, being the dissenting landlords attempt to persuade the Court to exercise its discretion to reject the plan, the Court rejected the landlords' arguments that the distribution of benefits under the plan was unfair. In addition, the Court underlined the established principle that the views of creditors, such as the relevant landlords, who were "out of money" would carry little weight when considering whether the Court should exercise its discretion.
To add insult to injury, the Court held that the plan's compromise of the parent company guarantee was justified to facilitate the restructuring, avoiding disruption to the services provided by the parent company and the wider group's plans for post-restructuring trade. The 'real world' impact of this decision is that commercial landlords, again, feel the financial brunt of a restructure.
As such, with the impact of decisions such as this, and the more challenging retail and wider 'high street' sector, it is imperative that landlords carefully manage any signs that their tenants are in financial difficulty, taking steps to pursue breaches promptly and proactively claiming against guarantors and former tenants wherever possible.
