A Restructuring Plan did not release guarantors to a lease from liability for rent and other arrears
In some good news for landlords, the High court has handed down judgment in a rent arrears case concerning the liability of guarantors.
In Oceanfill Ltd v Nuffield Health Wellbeing Ltd and Cannons Group Ltd the landlord, Oceanfill, had granted a lease to Nuffield, with Cannons acting as guarantor. In 2000, the lease was assigned to Virgin Active. Under the licence to assign, Nuffield guaranteed that Virgin Active would comply with its tenant obligations under the lease and Cannons guaranteed the performance of Nuffield of its obligations under the licence to assign.
Following widely reported financial difficulties, a Restructuring Plan for Virgin Active was approved in May 2021 pursuant to Part 26A of the Companies Act 2006 (a tool which was introduced in 2020 as a result of the pandemic to try and maximise businesses' chances of survival). The Plan provided that Virgin Active was not liable to pay any past, present or future rent, service charge or other liabilities. Instead, Oceanfill would be entitled to a return under the Restructuring Plan of less than 1p in the pound.
Proceedings for rent arrears were issued by Oceanfill against Nuffield and Cannons as guarantors and Oceanfill made an application for summary judgment.
Nuffield and Cannons defended the claim on the basis that the effect of the Plan was that the rents claimed were not sums that had fallen due pursuant to the Lease because the Plan had varied the lease terms so as to release Virgin Active from any outstanding liability and reduce the rent falling due under the lease to zero for the duration of the Plan.
Dismissing these arguments, the Judge held that a Restructuring Plan takes effect by operation of law as between landlord and tenant. It is not a re-writing of the lease, it simply releases the tenant from liability. Alternatively, to the extent that it is a re-writing, it leaves unaffected the rights of the landlord against third party guarantors – as between them, the lease remains valid and subsisting and the rent continues to fall due. The licence to assign also made clear that the guarantors would not be released by variations to the lease or by "any other matter…by which the tenant would be exonerated either wholly or in part from its obligations under this deed other than a release… given by the landlord". The Judge commented that the Restructuring Plan could not operate "by any stretch of the imagination" as a release of the guarantors by the landlord.
The guarantors' defence therefore failed and Oceanfill was entitled to judgment on the claim. Please note that cases like this are fact specific, and guarantees can be drawn up in a variety of different ways. It is important to take proper advice if faced with a situation like this.