The Covid-19 pandemic has caused difficulties for many businesses across the UK with some sectors impacted severely by lockdowns and the knock-on changes in consumer behaviour. Across Scotland and the UK in general the retail and leisure industry is one sector that has been particularly impacted by sharp and significant falls in revenue from March 2020; with many businesses struggling to maintain ongoing obligations to pay rent on commercial premises during lockdowns and opening restrictions. It is estimated that as at May this year commercial rent arrears across the UK exceeded over £3 billion.

In Scotland to try to protect commercial tenants Holyrood extended the irritancy notice period from 14 days to 14 weeks; however the problem of legacy rent arrears in the retail and leisure industry in Scotland will not be resolved by delays to enforcement.

The Corporate Insolvency and Governance Act 2020 ("CIGA") introduced many significant changes to UK insolvency practices; with one of the permanent changes being particularly interesting as a vehicle for commercial tenants to resolve the issue of legacy rent arrears. CIGA introduced Part 26A to the Companies Act 2006 in June 2020. A Part 26A scheme of arrangement ("Super Scheme") differs from a scheme of arrangement under Part 26 in several distinct ways:

  • It is not available to everyone, only debtors facing current or anticipated financial difficulty can apply to the scheme;
  • Voting is more straightforward with approval of 75% by value or each class of creditor as opposed to 75% by value and a majority by number under Part 26; and
  • Cross-class cram down: a Super Scheme does not require the consent of each class of creditor, provided at least one class of creditors vote in favour of the Super Scheme the courts can impose it on all creditors provided the dissenting class would not be worse off compared to any relevant alternative. Any such relevant alternative being decided by the courts as the most likely outcome should the Super Scheme be rejected. For UK based debtors the relevant alternative will most likely be Administration or Liquidation.

A Super Scheme was first successfully used by Virgin Atlantic in September 2020, albeit the case did not really test the boundaries of the process as there was little creditor resistance. More recently Virgin Active's Super Scheme was successfully sanctioned by the English Courts in May 2021. The Super Scheme was resisted by landlords as it proposed to wipe out the majority of the rent arrears; however it was approved by the Court leaving many landlords concerned about the direction of travel towards a more tenant friendly process. CVAs have historically been the tenant's preferred tool of choice when struggling with cash flow pressures; I suspect however, Super Schemes will be increasingly preferred given the ability to use cross-class cram down to remove power from dissenting creditors.

The next test of the Super Scheme will likely be the National Car Parking ("NCP") Super Scheme. NCP have over 500 car parks across the UK and has seen revenues fall by over 80% during the pandemic. NCP have reached a deal with their largest landlord which is likely to only encourage the remaining landlords to oppose the proposed Super Scheme; albeit rent reductions and write downs may be the pill all commercial landlords are forced to swallow to allow the retail and leisure industry to bounce back from the pandemic. If this is indeed the case then many tenants may find that landlords are increasingly disinclined to take on any tenant without a strong covenant; and furthermore they may be that much quicker to take decisive action when a tenant is in trouble: ever silver lining has a cloud as they say….