How New Restructuring Plan in Insolvency Affects Landlords?

The introduction of the new “Restructuring Plan” in the Corporate Insolvency and Governance Act 2020 (CIGA) has changed the way financially struggling companies navigate insolvency proceedings. While this plan aims to give struggling businesses a better chance to restructure their debts and operations and avoid liquidation, it presents unique challenges and potential disadvantages for landlords, who are often major creditors in these situations. In this article, we’ll dive deep into the various ways the new Restructuring Plan in insolvency affects landlords.

Key Changes and Why They Matter to Landlords

In the past, landlords often held significant influence over company restructurings. Their large claims under leases gave them substantial voting power in procedures like Company Voluntary Arrangements (CVAs). With the new provisions of the CIGA 2020, this power has been severely diminished. Now, if landlords overwhelmingly reject a plan, the court can still forcefully approve it through a legal doctrine called “cross-class cramdown,” if at least one other creditor class votes in favour.

Here's how this doctrine is applied in a typical insolvency hearing:

Creditors are categorized into different classes based on shared characteristics or economic interests in the company. Each class votes on the proposed Restructuring Plan.

Unlike in Company Voluntary Arrangements (CVAs), a minimum approval threshold is not mandated; but, the plan itself might specify a required approval percentage within each class.

Critically, if at least one class approves the plan, the court can still impose it on dissenting classes (including landlords) under two specific conditions:

No Worse-Off: The dissenting class (landlords) must be no worse off financially under the plan than they would be in a liquidation scenario.

Fair & Equitable: The plan must be deemed “fair & equitable” to all creditors, ensuring a reasonable distribution of future income and remaining assets.

As you can see, the cross-class cramdown doctrine has significantly reduced landlords’ leverage in the negotiation process. Once a court approves a Restructuring Plan, it becomes binding on everyone, including dissenting landlords. Landlords also have limited ability to pursue further action against their tenant/s to recover debts outside of what the plan dictates.

They can no longer take the actions they’d normally take to recover debts, even if it means they can’t get all their rent arrears back. Restructuring Plans can also modify terms like lease length or rental payment amounts. Landlords may be stuck with changes they consider unfavourable, with little-to-no recourse.

What Can Landlords Do?

The new provisions of the CIGA 2020 may have thrown many challenges down the paths of landlords. But, they aren’t totally powerless. Here are some key strategies landlords can adopt to protect their interests:

Precautionary Measures

Landlords must revisit their existing lease agreements and identify clauses that might strengthen their position in the event of tenant insolvency. The clauses that could be helpful include:

• Forfeiture clauses that enable landlords to terminate leases and reclaim properties if tenants breach certain terms, including not paying rent on time.
• Preferential payment clauses that give landlords priority over other unsecured creditors in claiming outstanding rent.
• Strategic Objections

Even though their votes or objections might not guarantee plan approval, landlords can still benefit from voicing strategic objections during the voting process. For example, if a company tries to enforce a restructuring plan through cramdown at a court hearing, landlords can and must present a well-supported case to the court explaining why the plan is unfair or fails to meet the “no worse off” test. Seeking legal advice from a qualified insolvency lawyer is, of course, crucial before making such a case.

Landlord Software Help

Property management software for landlords can be an invaluable asset during insolvency hearings. The best property management software tools for landlords can accurately track rental payments with clear dashboards. Spotting late payments, arrears, and other trends that typically indicate financial trouble for tenants, becomes much easier with these tools. These tools can give landlords early warnings regarding their tenants’ financial discrepancies and they can take better proactive measures.

Plus, rental software tools for landlords also serve as helpful document management systems. They store and track all communication with tenants and give landlords centralized access to important lease agreements and other property-related documents. Landlords can swiftly retrieve key clauses like termination rights or forfeiture provisions, along with past emails and agreements with tenants, via these tools. Such easy and direct access to important information can drastically strengthen their position during insolvency hearings.

That’s why many forward-thinking landlords use RentOnCloud, the UK's first cloud-based platform for streamlining all aspects of property management. This rental software tracks income and expenses effortlessly, generates reports with a few clicks, and stores all lease agreements, communication records, and other crucial documents in one centralized location for swift and secure access. By embracing the innovative solutions offered by RentOnCloud, landlords can navigate the complexities of insolvency hearings with confidence and optimize their overall property management journeys.