The High Court has held an original tenant and guarantor of a lease liable for unpaid sums due where the new tenant had compromised its liabilities under the lease pursuant to a restructuring plan under Part 26A of the Companies Act 2006 (CA 2006). Read on for our analysis of Oceanfill Limited v Nuffield Health Wellbeing Limited and Cannons Group Limited  EWHC 2178 (Ch).
The lease and licence to assign
In 1998, Nuffield Health Wellbeing Limited (Nuffield) entered into a lease of a gym with the landlord, Oceanfill Limited (Oceanfill) for a term of 25 years (the lease). Nuffield’s obligations under the lease were guaranteed by Cannons Group Limited (Cannons).
In 2000, the lease was assigned to the current tenant, Virgin Active Limited (VAL), by way of a licence to assign (the licence), authorised guarantee agreement and guarantee. Under the terms of the licence, Nuffield guaranteed VAL’s performance of the terms set out in the lease and agreed to indemnify Oceanfill against any failures to perform. Nuffield’s performance of the obligations under the licence were further guaranteed by Cannons.
The restructuring plan
The Covid-19 pandemic forced VAL to close its gym and leisure facilities for a prolonged period, depriving VAL of the income it required to pay rent and placing it in serious financial difficulties. Accordingly, VAL proposed a restructuring plan pursuant to Part 26A CA 2006 (the plan).
Under the plan, Oceanfill was a “Class D landlord”, and the lease was a “Class D lease”, meaning that from the effective date of the plan no past, present or future rent, service charge, insurance or other liabilities would be payable, and VAL would no longer have any obligations towards them. Despite all the Class D landlords voting against the plan, the court was satisfied that they would not be any worse off than the relevant alternative and, consequently, the plan was sanctioned.
Subsequently, VAL did not pay the rent and other sums that would have otherwise fallen due to Oceanfill under the Licence. Oceanfill argued that Nuffield and Cannons were liable under the guarantees, giving rise to the claim.
Oceanfill issued an application for summary judgment against Nuffield and Cannons, as guarantors under the licence, for the rent, sums for legal costs and disbursements payable under the lease for a total sum of £141,255.22. The application was defended on grounds mainly pertaining to points of law and construction, which we touch upon below. These points were individually addressed by Deputy Master Arkush:
1. The legal effect
It was argued that the effect of the plan was to rewrite the lease which had the effect of releasing Nuffield and Cannons as guarantors from their obligations. It was alleged that the legal effect of the plan from the date of sanction was to:
- vary the terms of the lease,
- release VAL and its guarantors from any outstanding liability and
- reduce the rent falling due pursuant to the lease to zero.
However, drawing upon case law relating to schemes of arrangement under Part 26 CA 2006, Deputy Master Arkush concluded that a Part 26A restructuring plan takes effect by operation of law rather than deemed agreement through re-writing the lease. As a result, the landlord’s rights against the guarantors were unaffected. Alternatively, even if the lease had been rewritten, it had only been rewritten as between the landlord and the company subject to the plan, leaving the landlord’s rights against third party guarantors under the lease unaffected.
2. Variation to the licence
Secondly, it was argued that since the obligations in the licence had been varied by the plan, no arrears had arisen under the lease and VAL had not breached any covenants resulting in liability for Nuffield and Cannons. However, the terms of the licence set out a clear provision that Nuffield and Cannons will not be released by variations to the lease. It was therefore held that the plan merely released VAL from its obligations by operation of law and did not extend to any third-party guarantors.
3. Other compelling reasons
A copy of the assignment agreement entered into between the parties was not available, but it was argued that the assignment may contain provisions that were material to liability. However, it was considered unlikely that the assignment would contain terms that were not aligned with the terms set out in the licence.
In light of the above, the High Court held that the guarantors’ liabilities under the licence had not been compromised by the plan, and the landlord was entitled to claim against Nuffield and Cannons for sums falling due under the lease. In this instance, the plan was silent as regards any potential “ricochet claims” against VAL as tenant by the guarantors for discharging liabilities to the landlord. It remains to be seen whether any such claims come to fruition in due course.
David Steinberg, restructuring and insolvency partner at Stevens & Bolton, commented: “This is a welcome judgment for creditors, and landlords in particular, since it provides other avenues for pursuing the amount due to them when a company is subject to a Part 26A restructuring plan. For guarantors, on the other hand, it highlights the risks of providing such guarantees, albeit the judge in this case flagged the potential for “ricochet claims” against the tenant company in the absence of any compromise of those claims in the plan itself. Proponents of restructuring plans should ensure careful drafting to restrict the ability of such claims to be brought by guarantors in future.”