The judgment in gym chain Fitness First's "cramdown" restructuring case has been published and makes it clear that occupiers will be backed against landlords if they can provide a "reasonable" argument that being placed into administration would be the alternative.
Fitness First's contentious plan for the restructuring of its estate were approved at the High Court a week ago.
Landlords including the Crown Estate and Lazari Investments challenged the previously unused "Restructuring Plan", a court-supervised business rescue procedure. Sky first reported that the groups were "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.
Mr Justice Green said the company had realised for some time that it did not have enough money to survive and that it needed to restructure its liabilities in the interests of its creditors. The major shareholder agreed to put around £1.5 million money into the company in January, but on condition that the restructuring went through.
The majority shareholder is Jayne Alison Best, tycoon Dave Whelan's daughter who owns 75.08% of the ordinary share capital of Maddox, the vehicle that owns Fitness First.
In August 2022 Deloitte was appointed to market the business for sale but no offers were made for the entire business.
Green ruled that the plan put forward now was not unreasonable either for the company or for Best. He added: "The relevant alternative is administration."
Green said that prior to the COVID-19 pandemic, the company had operated a profitable business but it suffered badly during the crisis and there was a dramatic fall in membership fees which is the business's main source of income.
He said the landlords had a legitimate complaint about the lack of engagement and the resistance to providing information, and therefore he was not ordering the landlords pay costs.
But he added: "At the end of the day I have to look at what is being proposed and whether it is fair as between the creditors, taking into account their economic interests in the company and the fact that Parliament has decreed that where creditors are no worse off under the Plan than the relevant alternative, those creditors' opposition to the Plan can be overridden."
Speaking to CoStar News, Katherine Campbell, head of real estate disputes at lawyer Reed Smith, said: "I think what the judgment shows is that these plans and CVAs are part of the rescue landscape for companies and if it is reasonable that the proposal's only real alternative is administration it will be agreed.
"It is further clear evidence that judgments will look at where the stress is for the occupier. The company was criticised for lack of information and the judge said the landlords were right to bring this complaint but this alone does not get you home."
According to the judgment, five of the nine classes of creditors did not vote in favour of the plan, to meet the required 75% majority in value. Those five were all landlords of premises used by the company for gyms. The company is now a relatively small one with 36 open gyms, mainly in London.
Five landlords appeared before the court to oppose the plan, Lazari Investments, Daejan Investments, the Crown Estate, Vanquish Properties GP Nominee 3 and Vanquish Properties GP Nominee 4.
Under the plan all except one class of landlord will be forced to accept a reduced rent for a three-year period or, in some cases, no rent at all. Around eight gyms have been shut.
In March 2021, some landlords of fitness chain Virgin Active, including British Land and Landsec, hired a leading lawyer 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 is a court-supervised business rescue procedure introduced by the Corporate Insolvency and Governance Act 2020. The process was backed at the High Court of England and Wales 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.
Green said the groundwork for the ruling had essentially been laid down by the Virgin Active case and the judge's "three-step no worse off" guidance.
"The 'no worse off' test can be approached, first, by identifying what would be most likely to occur in relation to the plan companies if the plans were not sanctioned; second, determining what would be the outcome or consequences of that for the members of the dissenting classes (primarily, but not exclusively in terms of their anticipated returns on their claims); and third, comparing that outcome and those consequences with the outcome and consequences for the members of the dissenting classes if the plans are sanctioned."