Oceanfill Limited v Nuffield Health Wellbeing Limited and Cannons Group Limited

The High Court has considered the effect a Restructuring Plan – and in particular, the compromise of obligations under a lease – has on third party guarantors of those obligations.

Sanction of the Virgin Active restructuring plan

The affected group of landlords opposed the Virgin Active Restructuring Plan, but the Court nonetheless sanctioned the plan and applied the new cross-class cram down mechanism (under Part 26A of the Companies Act) on the basis that other classes of creditors with a genuine economic interest agreed to the plan, and that those landlords would be no worse off under the plan than they would have been under the relevant alternative – the company going into administration.

Compromise of rent under the Restructuring Plan

The Restructuring Plan provided that all past, present or future rents and other liabilities were “irrevocably and unconditionally compromised, released, discharged and brought to an end”, and that any sums payable under each lease would be “reduced to nil”, in exchange for a specified sum of money.

Claim against guarantors

One of Virgin Active’s landlords – Oceanfill – sought to recover rent owed under Virgin Active’s lease from the former tenant – Nuffield Health – and the former guarantor – Cannon – each of whom had entered into Authorised Guarantee Agreements ("AGAs"), guaranteeing Virgin Active’s performance, on the assignment of the lease to Virgin Active.

Oceanfill claimed the rent arrears which had been the subject of the Restructuring Plan from these AGA guarantors, and sought summary judgment.

Guarantors' refusal to pay

Nuffield and Cannon argued they were not responsible for the rent arrears because:

• the lease had been varied by the Restructuring Plan, so the rent hadn’t fallen due;
  
  
• as the Restructuring Plan stated it was “deemed to take effect...as having been made by deed”, Oceanfill had consented to a variation of the lease, thereby releasing the guarantors;
  
  
• the judgment sanctioning the plan had expressly compromised some landlords’ claims against guarantors (which were parties to the plan), to avoid the guarantors having a “ricochet” claim against Virgin Active and defeating the purpose of the Plan. Nuffield and Cannon argued that this should apply to them, as any claim made against them could ricochet back onto Virgin Active;
  
  
• Under the terms of their guarantees, they were obliged to comply with the covenants – as varied – at the relevant time. They argued that the lease had been varied such that no rent was payable, so they had no obligation under their guarantees.

Judgment in favour of the landlord

Deputy Master Arkush gave judgment in favour of Oceanfill. He rejected the argument that the lease had been “re-written” and was clear that the Restructuring Plan only affected Virgin's obligations to the landlord, and not the landlord's rights against third parties; as between them, the lease remained in place, and rent continued to fall due. As such, the Restructuring Plan did not release the guarantors from their obligations under the lease.

Similarly, he rejected the argument that the Restructuring Plan took effect as a deed, and therefore a variation of the lease, on numerous bases, including that:

• the wording of the Restructuring Plan itself preserved landlord creditors’ rights;
  
  
• the terms of the guarantees provided they would continue despite any variation of the lease; and
  
  
• the Restructuring Plan took effect by operation of law, rather than by consent, and any hypothetical deed would need to make that clear in order to vary the lease.

He also rejected the “ricochet” argument, as the Restructuring Plan had expressly included some guarantors to avoid them having a ricochet claim, but this did not include Nuffield and Cannon.

Suitability for summary judgment?

Finally, Nuffield and Cannon argued that the claim shouldn’t be determined by summary judgment, and should proceed to a full hearing.

Deputy Master Arkush found the claim was capable of being determined by summary judgment on the basis that it was “a case that gives rise to short, if novel, points of law or construction” and he was satisfied that he had seen “all the evidence necessary for their proper determination”.

A victory for landlords?

The introduction of the cross-class cram down mechanism has caused concern among landlords that they will be forced to accept a Restructuring Plan which effectively re-writes the lease to remove rent liability.

This judgment gives some comfort that landlords can still claim for unpaid rent under AGAs, even where it has been compromised (as against the tenant) under a Restructuring Plan. 

However, as so much hinges on the wording of the Restructuring Plan itself, companies proposing Restructuring Plans may in future seek to cast a wider net, and include third party guarantors in the plan to benefit from the “ricochet” argument which was rejected in this case.