Virgin Active gets legal right to wipe out rent arrears as part of restructuring

A court has given Virgin Active the green light to erase the rent arrears it had accrued during pandemic lockdowns.

The wiping out of the arrears is at the heart of the health club operator's restructuring plan, which was sent for a court hearing, following opposition from landlords, including Aberdeen Standard Investments, British Land and Land Securities Group.

During the hearings, Virgin Active said that without the restructuring plan – devised under the government's new Part 26A of the Companies Act 2006 – it would fall into administration within days.

The landlords argued the case, saying that there were other options available for Virgin to save the company, such as putting up some of its assets for sale – or even the entire company.

The case was heard by High Court Judge Richard Snowden, who backed Virgin Active's case.

Court documents show Virgin Active Health Club Holdings was recently valued at £350 - £400m on an adjusted enterprise value valuation.

The documents also show that the forced lockdown closures have had a dramatic effect on the company, which suffered a drop in income of £185.4m year-on-year in 2020, and £53m year-on-year for the first two months of 2021.

The underlying EBITDA of the group fell from a profit of £56.8m in the year ending 31 December 2019 to losses of £42.1m in the year ending 31 December 2020 – a fall of 173.7 per cent.

While the decision is a significant victory for Virgin Active, there is uncertainty over whether the ruling will have a wider effect on disputes over rent arrears relating to the pandemic lockdowns.

Matthew Padian, restructuring and insolvency expert at Stevens & Bolton, told HCM that, ultimately, the decision is unlikely to signal a wave of similar restructuring plans on the horizon.

"Likened to a ‘CVA on steroids’, Virgin Active’s approved restructuring plan raises the stakes in the ongoing landlord vs tenant unpaid rent battle," Padian said.

"However, concerns around the threat of future restructuring plans should not be overestimated.

"They can only be launched by companies that have encountered, or are likely to encounter, financial difficulties affecting their ability to carry on business.

"Admittedly, this is a very low bar. But as we emerge from the pandemic it’s likely that greater attention will be focused on whether companies resorting to restructuring plans are doing so for the right reasons.

"While Virgin Active’s plan could encourage others to follow suit, the number of cases deploying this mechanism remains low to date.

"Launching such a plan is a heavily court-focused process, making it both expensive and time-consuming, so it’s really no surprise that it’s better suited to larger companies with secured creditors."