Landlords lose challenge to Virgin Active’s restructuring plan

A High Court judge has approved Virgin Active’s restructuring plan, rejecting a legal challenge from a group of landlords owed as much as £30m in unpaid rent. The case is the latest in a series of challenges brought by landlords unhappy with the terms of court-approved CVA restructuring plans struck between high street businesses and their creditors. The landlords argued the proposals, which will see some leases of poorly performing gyms terminated and certain other landlords being paid less in rent, were not “just and equitable”. The case is highly time-sensitive. The company was due to run out of liquidity this week and is in danger of being forced into administration. According to the ruling, Virgin Active’s landlords are the second-most significant group of creditors, after the secured creditors. The group is made up of 46 landlords who have granted a total of 67 leases over 45 properties. By the end of May the company will be in rent arrears of £30m, all of which is unsecured debt. However, money owed to the secured creditors dwarfs that owed to the landlords. They have extended £200m in loans to the company. A group of those creditors, owed £164m, were represented at the hearing and supported the CVA. According to the ruling, prior to the Covid-19 pandemic Virgin Active was in a “strong and sustainable financial position”. However, closure caused by the pandemic led to a drop in some of £185m in 2020 and £53m during the first two months of 2021. At the same time, the company still has significant fixed costs and overheads. At the same time, landlords, due to the Coronavirus Act of 2020, have temporarily had their right of re-entry suspended. According to the judgment, in February and March the secured creditors reached a funding agreement with the company extending the duration of the credit but not reducing the amount owed. Creditors took a vote and 75% of them backed the plans. Landlords who hadn’t taken part in the formulation of the plans took legal action and asked the High Court to refuse to sanction it. During a week-long hearing, the judge, Mr Justice Snowden, heard “volumes” of legal submissions from both sides. And in a ruling handed down today, he rejected the landlords’ arguments and backed the plan. He said all of the proposals in the strutting agreement were compromises with the company and creditors to “mitigate” Virgin Active’s financial difficulties. The alternative, he said, would be for the company to fall into administration. He said the rescue agreement doesn’t leave the landlords “any worse off” than if the company goes into administration. “The plans have been agreed by a number representing 75% in value of a class of creditors, present and voting, who would receive a payment, or have a genuine economic interest in the company, in the event of the relevant alternative,” he said. “I will therefore sanction the plans in the terms sought.” Today’s approved plan “raises the stakes in the ongoing landlord v tenant rent battle,” according to Matthew Padian, restructuring and insolvency expert at  law firm Stevens & Bolton. However, he added: “Landlords may take some comfort in the fact there isn’t long to go until the ban on evicting commercial tenants for non-payment of rent – set to end on 30 June – falls away. But, in the meantime, landlords entering into new leases may want to ensure that forfeiture clauses bite upon the proposal of a restructuring plan by a tenant, and also that rent concessions fall away if a restructuring plan is launched.” This is the second disputed CVA to be approved this week. On Monday a judge approved the CVA of retailer New Look, despite a challenge by landlords. Virgin Active and its landlords Total number of landlords: 46 Total number of leases granted: 67 Total number of properties: 45 Total arrears of unpaid rent: £30m (all unsecured) Picture © Shutterstock