How Covid-19 Has Changed The World For Retail Landlords

Around 40 years ago, if a retailer wanted to occupy premises in a primary location, it probably had to sign an ‘institutionally accepted 25-year lease with five-yearly upward-only rent reviews’ – ‘take it or leave it’ said the landlords.

And the tenant taking such a lease was ‘on the hook’ for the balance of the 25 years – even if it assigned the lease.

The impact of legislation changes on such landlords

The introduction of the Landlord & Tenant (Covenants) Act 1995 meant tenants could ‘get off the hook’ for post-1995 leases, by assigning the lease (and keeping their fingers crossed there is no default by their assignee who they usually have to guarantee). Market conditions also introduced a greater degree of flexibility of terms in leases.

However, the pandemic has put the finishing touch to the reversal of the landlord/tenant balance of the bargaining position. Something is happening which was almost unimaginable a few years ago. Tenants can effectively stop paying rent for the time being and some are even getting their leases rewritten in their favour!

But how can this be? Surely a ‘deal is a deal’. The answer is ‘Covid moratoria, CVAs, schemes and restructurings’

The Government has confirmed that the rent moratorium protecting commercial tenants from eviction for not paying rent, introduced in 2020 in response to the Covid-19 pandemic, will continue until 25^th March 2022.

This does not include rent arrears and interest on them accruing, but the Government has said that in the event of commercial negotiations between tenants being unsuccessful, tenants and landlords will enter binding arbitration.

So it looks like landlords will not just be able to wait until the end of the moratoria and then immediately demand payment of arrears and interest ‘or else!’ The tenants will be in a position to negotiate a solution to the arrears. It is not yet clear what such a solution may be. Landlords face a protracted period of uncertainty.

But some tenants are already taking steps to restructure their liabilities, including their lease liabilities. They are doing this by putting forward Company Voluntary Arrangements (CVA), schemes of arrangement and restructuring mechanisms, and these are being tested through the Courts.

A CVA is a statutory procedure intended to assist in the rescue of a company in financial difficulties. If 75% by value of creditors approve the proposed arrangement, all are bound (unless a creditor can show that it is unfairly prejudiced).

Scheme of arrangements were introduced under Part 26 of the Companies Act 2006. In a scheme of arrangement, the company looks to compromise different classes of creditors and members with each class having similar rights. Each class votes on the scheme of arrangement and the approval of 75% in value and a majority by number is required. The Court then decides whether to sanction it.

Unlike a CVA, a scheme of arrangement can bind any secured or preferential creditor without his/her consent. A secured creditor is entitled to vote but only in respect of the unsecured part of its claim.

Restructuring plans were introduced under the Corporate Insolvency and Governance Act 2020. Part 26 Schemes of arrangements and the newly introduced Part 26A restructuring plan are procedurally similar processes for implementing a restructuring. They both involve the Court to a greater extent than a CVA does.

So how are these restructuring mechanisms being used to vary what landlords thought were leases ‘set in stone’?

Recent case law

There have been a variety of cases recently which relate to the insolvencies of substantial tenant entities, which we will now consider. These cases provide some clarity on the position of landlords where a tenant enters into a voluntary arrangement, scheme of arrangement or restructuring under Part 26A of the Companies Act 2006.

Lazari Properties 2 Ltd and others v New Look Retailers Ltd and others

First up, in Lazari Properties 2 Ltd and others v New Look Retailers Ltd and others, disgruntled landlords attempted to set aside a CVA put forward by their tenant, fashion retailer, New Look. The CVA had outlined different treatment for different categories of creditors. The Claimant Landlords, who had been most impacted by the CVA, failed in their attempt to convince the Court that the CVA was unfairly prejudicial.

Carraway Guildford (Nominee A) Ltd and others v Regis UK Ltd and others

One week after the previous case, dissatisfied landlords were successful before the same Judge (Zacaroli J.) in relation to a similar dispute. The Claimants sought to set aside a CVA put in place by Regis UK Ltd, which owns a number of hair salons, on the basis of unfair prejudice.

The Claimants argued that the CVA had unfairly regarded one of Regis UK Ltd’s creditors, which was a holding company, which was the sole member of Regis UK Ltd and held all trademarks and branding by which it traded. As the holding company was seen as being critical to the company’s ability to continue commercial operations, it had been excluded from the effects of the CVA. The Court agreed this prepared arrangement was unfairly prejudicial.

Re Virgin Active Holdings Ltd & others

In this case, despite landlords opposing it, the Court approved a restructuring plan for Virgin Active Holdings Ltd – which runs a number of health clubs.

Points of significance regarding these cases:

1. In cases involving tenant CVAs, schemes of arrangement or restructuring plans under the Companies Act 2006, it is now common for creditor landlords to be categorised into various groupings involving, e.g.:

• Top category essential premises (landlords’ rights are unaffected by any restructuring proposals);
• Economically viable premises (reductions in rent and lease changes could be enforced); and
• Non-viable premises or where a business has closed and the premises are no longer open (where the proposal may attempt, in one way or another, to end the tenant’s liability).

2. A CVA may not only alter liabilities (e.g. rent) of a lease but could also change the terms of the lease itself.

3. But CVAs shouldn’t adjust a landlords’ proprietary rights.

4. To date, there has been no reported cases where a tenant wishes to continue to trade in premises but the landlord decides to exercise its termination right. In such cases, if the lease is 1954 Act protected, a landlord cannot secure possession of commercial premises unless they have also served a section 25 notice on the tenant, which gives them six months’ notice and specifies one of the seven grounds of opposition to renew a lease.

5. A restructuring proposal put in place under Part 26A of the Companies Act 2006 (the new mechanism introduced by the Corporate Insolvency and Governance Act 2020) is likely to be a common alternative to the CVA route for many tenants. Using this method, once approved by a class of creditors, a restructuring proposal is placed before the Court for approval. However, in such cases, the Court may put in force a “cross-class cram down” whereby the rights of all creditors (regardless of their class) are adjusted by the proposal, provided that no dissenting class of creditors would be worse off than if it wasn’t approved (e.g. if the company went out of business).