A number of the country's biggest commercial property owners are joining forces to fight a restructuring plan being pursued by Fitness First to close gyms and cut rents across its estate.
Sky News has revealed that landlords including The Crown Estate, M&G Real Estate and Landsec will combine to challenge a restructuring plan due to be heard in court later this month. Sky adds that the groups are "furious" about the terms of the plan overseen by Fitness First's owner, the family of former sportswear tycoon and Wigan Athletic Football Club-owner, Dave Whelan.
Sources involved in the talks told CoStar News none of the landlords have exposure to large numbers of centres but are concerned that if the process is voted through without challenge it will open the door to a host of other companies using it to "cram down" or shift the financial burden of operating difficulties to landlords and their investors and away from the private shareholders and secured creditors.
Real estate sources have confirmed to CoStar News that the objections in particular focus on the level of financial information they have been shown, their singling out as a creditor class and the apparent repayment of a loan taken out by Fitness First under one of the government's COVID lending schemes. Sources also said there is confusion as to how Fitness First is presenting its membership numbers with little information available on the usage of clubs, given a member at one club may use the other clubs.
Sky reported Hilton, Legal & General Investment Management and Nuveen are also among the landlords involved in the challenge.
Fitness First is planning to use a "cram down" restructuring plan, a relatively new proposal in real estate, rather than the more familiar company voluntary arrangement. Under the proposals, 10 or just under a quarter, of its 44 UK sites would be shuttered. Rent cuts would be sought at many of the remaining sites, most of which are in London, with a court due to hear the case on 12 June.
Fitness First's most recently filed accounts show a loss of more than £10 million in the year to 31 March 2021. Teneo Financial Advisory was appointed administrator to Fitness First (Curzons) Limited, a company affiliated to the wider group, earlier this year, and has been contacting landlords.
As with other restructuring plans including CVAs it is understood that the centres have been batched into different buckets or classes of trading difficulty, with 'Class B' gyms those where Fitness First is seeking between 70%, 60% and 40% rent reductions, while Class C gyms may be subject to 10% reductions. No rent reductions are being sought at some gyms.
It is understood that the plan also seeks to write off COVID rent arrears even where agreements with landlords have already been made.
In March 2021, leading landlords of fitness chain Virgin Active, including British Land and Landsec, hired a leading QC as they fought a proposed restructuring that they said would create a new and "dangerous precedent".
The landlords were fighting the first use of the new procedure, now being employed by Fitness First, which they said forced property owners to write off rent debt arrears, reduce future rents and accept other changes to leases that were freely entered into.
The Restructuring Plan was then a new, court-supervised business rescue procedure introduced by the Corporate Insolvency and Governance Act 2020. The plan was backed at the English High Court in May 2021.
There have been relatively few uses of it, particularly to force property owners to write off rent debt arrears in the way that the highly contentious company voluntary arrangement process has been used.
In a statement supplied to CoStar News, the British Property Federation said it was not involved in the legal challenge but Ian Fletcher, policy director, British Property Federation, added: "We support the UK’s rescue culture but have concerns about how Restructuring Plans and CVAs have been misused in the past to enable businesses to terminate leases or renegotiate rents, forcing property owners to absorb significant losses with little attempt to build a recovery strategy they can support as economic partners.
“Property owners generally have strong relationships with their tenants and will be willing to support measures that enable struggling businesses to continue trading and protect jobs. Restructuring Plans should be a last resort and they need to demonstrate a clear route to turn around the business which property owners can get behind, and which demonstrate how all affected parties are working together equitably.”