Commercial Property: Whether a restructuring plan released a commercial tenant & guarantor from liability under an AGA (Oceanfill Ltd v Nuffield Health and Cannons Group Ltd – 2022)
Where a commercial tenant and its guarantor entered into an authorised guarantee agreement and a sub-guarantee of an authorised guarantee agreement, did a later restructuring plan of the business release them from their liabilities under such agreements?
In Oceanfill Ltd v Nuffield Health and Cannons Group Ltd , the claimant landlord owned premises used as a gym. Nuffield Health (“Nuffield”) was the original tenant under the lease, and Cannons Group (“Cannons”) the original guarantor. A licence to assign was granted by the landlord to Nuffield in 2000 for an assignment of the lease to Virgin Active Limited (“Virgin”), the premises’ current tenant. Under the licence to assign, and by way of an authorised guarantee agreement (“AGA”), Nuffield guaranteed the performance of Virgin’s obligations under the lease, and Cannons guaranteed Nuffield’s obligations under the AGA (a sub-guarantee referred to as a “GAGA”).
In 2021, a restructuring plan sanctioned under the Companies Act 2006 Pt 26A for Virgin was approved in the High Court. Claims by landlords were separated into classes, with the claimant landlord a Class D landlord. Class D landlords had voted against the restructuring plan. Landlords in this category would not receive payment in respect of any past, present or future rent or other liabilities.
In defending a claim by the landlord against the AGA and GAGA, Nuffield and Cannons argued that the effect of the restructuring plan was such that sums claimed had not fallen due. The AGA and GAGA required them only to meet the obligations insofar as they existed at the relevant time. No arrears were owed under the lease, as the restructuring plan varied the obligations under the lease, and therefore there had been no breach of the lease.
The High Court found in favour of the landlord, dismissing the Nuffield and Cannons defences.
It was not correct that the restructuring plan had varied the covenants under the lease; the plan only released Virgin from future liabilities and therefore concerned only Virgin and the landlord.
Both the AGA and GAGA stated that, other than where the landlord released them from lease obligations under seal, Nuffield and Cannons would not be released by variation of the lease. The High Court found that Virgin had been released from obligations by operation of law, but that this was not a release of the defendants’ obligations by the landlord made under seal.
Advice and action for landlords
This decision is reassuring for commercial landlords, finding that the landlord was entitled to summary judgment against the original parties to the lease. The case in particular does however addresses the effect of Part 26A of the Companies Act 2006, which states that an arrangement such as the restructuring plan entered into here may be sanctioned by the court, even where not all creditors vote in favour of its terms.
AGAs are intended to be called upon in circumstances such as this, where a landlord will seek payment from a guarantor where a restructuring plan is put in place for a later tenant. There are some forms of restructuring, such as IVAs, where guarantors may be released as they bind creditors by consent rather than by operation of law.
It was possible that Nuffield and Cannons would raise a further claim against Virgin to recover sums paid following a claim on the AGA/GAGA. The court in this case did not comment on whether such a claim would be successful, but both landlords and parties seeking to enter into restructuring arrangements are advised to identify any potential authorised guarantee agreements and potential claims arising from old leases and licences.
The High Court found in favour of the landlord. The High Court found that Virgin had been released from its lease obligations by operation of law, but that this was not an effective release of the defendants’ obligations as guarantors.