Rethink on restructuring urged as High Court rulings promise ‘world of hurt’

Outrageous, demonised, dangerous precedent, world of hurt. These are just a few of the words used by property owners and experts about two landmark High Court cases heard this week. On Monday, New Look was given leave to implement its CVA, under which landlords of more than 400 stores will receive turnover rent, while today, judges waved through a restructuring plan by Virgin Active that enables it to write off unpaid rent on most of its venues despite fierce creditor opposition. Katherine Campbell, head of real estate disputes at Reed Smith, said the Virgin Active judgment had “cut off landlords at the knees”. “We’re not just talking about Virgin’s landlords,” said Campbell. “Rather, landlords across the country could now find themselves being forced to accept restructuring terms, even in the face of express opposition.” Adam Coffer, chair of the Property Owners Forum and managing director of EPF Investments, described the judgment as “outrageous”. Coffer said: “Yet again, property owners are being demonised and seen as the easy touch to underwrite the failings of private equity-backed or well-funded businesses. In particular, the Virgin case is a CVA on steroids. “I absolutely deter aggressive landlord behaviour. But, equally, we must accept there has been unscrupulous behaviour from a minority of tenants that are typically well-funded and are large multiple operators. A CVA for a smaller business is totally understandable but the private equity-backed firms are [a different matter].” He added that the ruling perpetuates the “demonisation of landlords as cigar-chomping, pinstripe-suit wearing barons”, which is “fundamentally not the case”. The British Property Federation warned that the Virgin Active ruling could set a “dangerous precedent” for wealthy individuals and private equity-backed firms to use restructuring plans as a means of getting out of their contractual obligations with landlords after the “good times” are over. Virgin Active is among the first firms to turn to a so-called “cross-class cramdown” tool that forces landlords to accept a restructuring, even if it is opposed by fewer than 75% of creditors. Car park operator NCP is embarking on a similar strategy. Dozens of landlords were represented in the cases against both New Look and Virgin Active, claiming that the use of their mechanisms were both unfair and inequitable. The sector is calling on government to reassess the restructuring process. “This is fundamentally inequitable, and the government should not allow it to continue,” said BPF chief executive Melanie Leech. “The government must ensure clarity and fairness – property owners do not want to see businesses go into administration but preventing administration should not mean property owners are forced to absorb a disproportionate amount of pain compared to other creditors.” Leech added: “While the Covid-19 crisis has brought genuine hardship to businesses up and down the country, it has also been cynically used as an excuse to shift on to property owners the cost of years of failings and underinvestment – transferring wealth from property owners, who represent local authorities and millions of pensioners and savers invested in commercial property, to a business’s shareholders. “This abuse is short-changing our public finances and pensions, and damaging the investment that will underpin town centre recovery and the government’s levelling-up agenda to build back better.” “The government must take a strong look at the abuse of restructuring processes,” said EPF’s Coffer. “There are many insolvency practitioners that will not take on CVA cases because they morally and ethically object to them. There must be a means test – an obligation not to draw major bonuses and dividends at these PE companies involved in these restructurings – and there must be a cap on fee payments to the accountants.” “We urgently need to rebalance the scales, or risk inviting a world of hurt in coming months as landlords shoulder increasingly heavy cashflow issues” added Reed Smith’s Campbell. “In the battle between landlords and retailers, the current winds are blowing up a storm.” To send feedback, e-mail pui-guan.man@eg.co.uk or tweet @PuiGuanM or @EGPropertyNews Additional reporting by James Lumley Image © Virgin Active