Part 26 Restructuring Plans – the way forward for restructuring lease liabilities?

It has now been more than four years since the Corporate Insolvency and Governance Act 2020 introduced the Part 26 Restructuring Plan. After a slow start restructuring plans are now finding their place, particularly among large retail businesses seeking to restructure lease liabilities.

What Is a Part 26 Restructuring Plan?

A Part 26 Restructuring Plan is a court-sanctioned process allowing a company to restructure its debts and liabilities in the hope of avoiding administration or liquidation. Creditors vote on the plan, which sets out a detailed framework for how the company proposes to restructure its debts. It is a flexible tool that can accommodate a variety of restructuring approaches including the writing off or reduction of rent for commercial tenants.

Commercial landlords will likely already be familiar with the use of Company Voluntary Arrangements (CVAs) by large retail businesses looking to restructure their operations by exiting unprofitable sites and reducing rents elsewhere. The Part 26 Restructuring Plan is in many ways an evolution of that process and has some advantages over a CVA, particularly in the case of larger businesses, including increased flexibility and potential to deal with more complex restructuring scenarios.

A Part 26 Restructuring Plan requires creditors to vote in classes based on the nature of their claims. A key benefit for the company is that the court can approve the plan even if some classes of creditor vote against it, if the plan is deemed to be in the best interest of the body of creditors as a whole. This is known as “cross-class cram-down.” This ability is especially important for companies with a large or diverse range of creditors, as it prevents one group from blocking a plan that benefits the others. For landlords, this means that even if they (as a class) disagree with the proposed terms of a restructuring plan, the court may still approve it if it benefits the wider body of creditors.

How Do Restructuring Plans Affect Landlords?

One of the most significant aspects of a Part 26 Restructuring Plan for landlords is that it allows not only for the writing off or writing down of existing liabilities such as rent and dilapidations, but also for alterations to the terms of a lease on an ongoing basis, including rent reductions and enhanced rights to end the lease early.

Plans can seek to treat some landlords differently to others, drawing a distinction between profitable and unprofitable sites. Landlord creditors will often be split into sub-classes based upon the effect that the plan is intended to have upon them, for example:

  • Class A: Profitable sites where no rent reduction is sought
  • Class B: Sites where a rent reduction is sought in order to return the site to profitability
  • Class C: Sites that are considered unprofitable and where the tenant is seeking an exit

Potential benefits

The court should only sanction a Part 26 Restructuring Plan where it is satisfied that all classes of creditor will do better under the plan than they would under the most likely alternative scenario.

The plan should therefore allow landlords to recover a greater proportion of any arrears than in a liquidation or administration. It may also offer the prospect of an additional payout to creditors in circumstances where the restructuring is successful in returning the company to profitability.

In addition, all of the Part 26 Restructuring Plans that we have seen that seek to alter lease terms on an ongoing basis have also granted the landlord a right to regain possession of the property if they are not happy to accept the new terms.

Key Considerations for Landlords

Plan Terms

Landlords will need to carefully review the proposals, particularly any changes in rent, duration, or other key terms such as exit rights, and consider how these changes will impact both short-term cash flow and long-term property value as against the most likely alternative.

Legal and Professional Advice

Part 26 Restructuring Plans can be complex and we would highly recommended that landlords seek legal advice when navigating one. At Geldards we can help you assess the implications of the proposed plan and help formulate a strategy to protect your interests. This may include taking enforcement action in advance of the plan coming into force – for example we recently assisted a client in recovering over £200,000 of rent arrears via CRAR in between being served with the plan documentation and the first court hearing.

Conclusion

Part 26 Restructuring Plans are an important tool for businesses seeking to avoid formal insolvency. While these plans may require landlords to accept rent reductions, they can also help tenants avoid liquidation, which could result in landlords losing valuable rental income altogether. They can also offer landlords enhanced rights to take back possession in circumstances where they do not want to be bound by the new terms.

The flexibility of Part 26 Restructuring Plans presents an opportunity to strike a balance between supporting tenants through tough times and safeguarding the landlord’s financial interests. For landlords, the key is to understand the full context of the restructuring, assess the proposal against the most likely alternative, and seek professional advice to ensure that their interests are protected.

How can we help?

At Geldards our restructuring and insolvency specialists are experienced in advising on Part 26 Restructuring Plans and can support you in relation to your options and decision-making to achieve the best result possible.

If you are impacted by a Part 26 Restructuring Plan and would like assistance, please do not hesitate to contact Ruth Thurland or Michael Evans.

 

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