Trowers & Hamlins acts for landlord removed from controversial restructuring plan.
On 30 September 2024, four companies within the Cineworld Group, the second largest cinema chain in the world, secured court sanction for contested Part 26A Restructuring Plans. Cine-UK Ltd, Cineworld Cinemas Ltd, Cineworld Cinema Properties Ltd, and Cineworld Estates Ltd (the "Plan Companies") proposed restructuring plans (the "Plans") which enforced rent reductions or lease terminations upon landlords for a large number of cinemas.
The Plans were controversial and strongly objected to by landlords, but the Court sanctioned them nonetheless, as detailed further in our Property Litigation Bulletin. However, our work on this matter demonstrates that there are options available to landlords to protect their positions, if they are well advised and act quickly.
Background
The Cineworld Group has been grappling with financial difficulties for a number of years, exacerbated by the Covid-19 pandemic. The group was subject to a reorganisation under Chapter 11 of the U.S. Bankruptcy Code in 2022 and 2023. Despite this, the UK part of the group faced ongoing financial issues, which were exacerbated by the 2023 writers' and actors' strikes.
The distressed Plan Companies received advice that their cinemas were overrented. Although the US group had provided some financial support to the Plan Companies in June 2023 so they could meet rent liabilities, they would only continue to provide this support if the rents were reduced across the UK portfolio.
The Plan Companies therefore put forward restructuring plans which involved major compromises to their obligations as tenant:
- the rents for more than 100 cinema leases were to be compromised; and
- six cinemas were designated for closure: Glasgow Parkhead, Bedford, Loughborough, Yate, Swindon Circus and Hinckley.
Landlords voted against the Plans. However, at the subsequent sanction hearing the Plan Companies asserted that, notwithstanding the substantial reductions to rents leases and some sites closing, the dissenting classes of landlords caught by the Plans would be no worse off than they would be in the event of "the relevant alternative", i.e. the most likely outcome if the Plans were not sanctioned. The relevant alternative in this case involved the administration of the Plan Companies.
Two landlords oppose Court sanction of the plans at the sanction hearing. These landlords had previously negotiated rent reductions with the Plan Companies and it has been expressly agreed that the Plan Companies would not seek to compromise their position further via restructuring plans. This is exactly what the Plan Companies ultimately did, but the objections were not successful (although permission to appeal has been granted).
Trowers & Hamlins acted on behalf of Hinckley and Bosworth Borough Council ("HBBC"), a landlord creditor of Cine-UK Limited for one of the premises earmarked for closure. Following productive negotiations with the Plan Companies, a commercially viable settlement was reached. Less than 2 days before the sanction hearing, HBBC was removed from the Plans. As a consequence, the Cineworld at Hinckley has not been closed and it continues to trade.
Lessons for Landlords
Restructuring Plans are an important tool for the insolvency courts. They promote the "rescue culture" and enable court-sanctioned surgery to loss-making elements of a distressed company. Problematic liabilities can be compromised to rescue the business as a whole.
Landlords are increasingly vulnerable to being compromised via restructuring plans. As plans which focus on rents become more common, there are emerging lessons for landlords who wish to protect themselves from their leases being compromised:
- Strength in numbers. Landlords looking to challenge a restructuring plan should quickly ascertain the position of other creditors, both in their "class" and generally. Dissenting creditors working together have much more influence, both in voting and at the sanction hearing, than they would do alone.
- Negotiation for exclusion from the plan may be the best outcome. The preferred practical outcome for a landlord may not be to challenge the restructuring plan as a whole, but to reach a position where their removal from the restructuring plan is better for both landlord and the Plan Company tenant.
- Dissenting "out of the money" creditors have little influence on whether or not the court should sanction the plan. There is a clear and growing body of caselaw to confirm this, following the judgments in Re Virgin Active, Re Adler and Re Cine-UK & Others. Where their tenant has substantial secured debts, dissenting landlords will frequently run the risk of being out of the money.
- Scrutinise the relevant alternative. Forecasting outcomes for different classes of creditors is difficult for a plan company and its advisers to do accurately. Dissenting landlords should consider carefully their realistic position under the restructuring plans, vs the relevant alternative as described in the documents supporting the restructuring plan. Any assumptions or generalisations in a plan company's argument why classes of creditors are "no worse off" may offer grounds for challenge.
- A prior agreement not to compromise via a restructuring plan is not a defence. The opposing landlords at the sanction hearing sought to rely upon contractual terms that they would not be compromised. The court (subject to any successful appeal) held this negative covenant did not protect these landlords from the court sanctioning the plan and including their leases.
We expect to see plenty more commercial tenants which propose restructuring plans targeted at their property liabilities. Commercial landlords should be ready to act quickly to respond to such plans if they suspect their tenant may be financially distressed. Landlords will likely achieve a better outcome if they implement a swift response informed by the emerging insolvency caselaw.
At Trowers & Hamlins, we have substantial experience of advising landlords in dealing with distressed corporate tenants. Whether in the context of a formal insolvency process or otherwise, our team supports our clients in pursuing the best commercial outcome available in financially distressed situations.
