Fitness First restructuring plan could send ‘disastrous shockwaves across letting market’

Property Week understands landlords Lazari Properties 1, M&G Real Estate and the Crown Estate are preparing to challenge the restructuring plan in the High Court on 12 June, after it failed to pass the requisite majority vote from creditors, with several voting against it.

The plan would see 10 Fitness First sites across the UK closed and rent cuts at several of its remaining 34 sites, according to Sky News reports.

Katherine Campbell, head of real estate disputes at law firm Reed Smith, said the legal challenge to Fitness First’s plan was “unsurprising”.

She added: “If the plan succeeds, this is a potentially disastrous result that will send shock waves across the retail and leisure letting market.

“Landlords face being forced to take huge rent cuts or take back their properties, regardless of whether or not they vote in favour of the plan.”

David Marsden, property litigation partner at law firm Freeths, who is advising landlord Lazari Properties 1, told Property Week that the court would be asked to sanction “what is known as a cross-class cram-down”.

This means that under section 26A of the Companies Act 2006, a company can ask the court to approve a plan it determines to be more favourable to creditors than an alternative insolvency process, with all creditors bound to accept the outcome.

The case echoes the 2021 restructuring plan at another health club company, Virgin Active, which was granted legal approval to wipe out its rent arrears following closures during the Covid-19 pandemic.

Reed Smith’s Campbell said: “In the same way the Virgin Active restructuring was challenged in 2021, landlords fear that, under the [restructuring plan] mechanism, they will be crammed down as a class of creditors by other ‘in the money’ creditors.

“Restructuring plans are feared by landlords to be the more draconian replacement tool for the company voluntary arrangement, which was previously used by struggling retailers to rescue their business.”

Teneo Financial Advisory was appointed administrator to Fitness First (Curzons) Limited earlier this year.

The most recently filed accounts show the company lost £10.1m in the year to 31 March 2021. Accounts for the following year are late to be filed.

The Crown Estate, M&G Real Estate and Fitness First declined to comment.