Cineworld Cinemas Ltd -v- The Royal London Mutual Insurance Society
Geoffrey Zelin (instructed by Wedlake Bell) has successfully represented The Royal London Mutual Insurance Society in a mediation under the Commercial Rent (Coronavirus) Act 2022.
Cineworld Cinemas Ltd had sought relief from the payment of over £1.835 million of Protected Rent relating to a cinema in Enfield. Following an oral hearing of preliminary issues, the reference was dismissed on the ground that the tenant’s business did not meet the viability threshold under s.16 of the 22 Act.
Cineworld Cinemas Ltd is part of the wider Cineworld group and an intermediate holding company within the group’s UK division. As well as operating its own cinemas it is the holding company for 15 other Cineworld companies. The cinema industry was badly affected by the Covid-19 pandemic and Cineworld’s cinemas were subject to restrictions for the whole of the period from the original lockdown in March 2020 until restrictions were lifted in July 2021. With no ticket sales the tenant was unable to meet its obligations under its lease of a site owned by Royal London.
In August 2021 Royal London issued proceedings for recovery of rent arrears and in January 2022 it made an application for summary judgment. In the meantime, on 10 November 2021, the government published the Commercial Rent (Coronavirus) Bill which provided for a scheme of arbitration under which tenants whose business had been affected by restrictions imposed in response to the pandemic could seek relief against payment of rent referable to periods when restrictions were in force (“protected rent debt” or “PRD”). Relief is only available where the tenant’s business is viable or would be viable if the tenant were granted relief. The PRD I relation to the Enfield premises was over £1.835 million. The tenant sought an adjournment of the summary judgment application (a) pending the outcome of the appeals in BNY Mellon v Cine-UK and London Trocadero v Picturehouse, cases involving other Cineworld group companies. As guarantor of the Picturehouse lease, Cineworld Cinemas Ltd was also a defendant in Trocadero v Picturehouse and (b) pending the introduction of the statutory arbitration scheme. The Bill was passed into law and the arbitration scheme came into effect in March 2022. The appeals were decided against the Cineworld companies, following which London Trocadero presented a winding up petition against Cineworld Cinemas Ltd.
In August 2022 the Cineworld group announced that it was considering seeking Chapter 11 Bankruptcy protection in the United States, and on 7 September 2022 the ultimate holding company and a large number of group companies including Cineworld Cinemas Ltd filed for and obtained Chapter 11 relief in Texas with the intention of refinancing and restructuring the business of the group. On 22 September 2022 Cineworld Cinemas Ltd referred the matter of relief from payment of the PRD for the Enfield cinema to arbitration under the Act.
Royal London applied for two preliminary issues to be determined at an oral hearing:
- Whether the fact that proceedings had been issued before 10 November meant that the case fell outside the statutory scheme altogether, and
- Whether Cineworld Cinemas Ltd’s business was “viable” within the meaning of the Act.
The arbitrator held that the case did fall within the scheme and went on to consider the viability of the business. Crucial to that issue is the fact that under s.16(3) of the Act the possibility of the tenant borrowing money or restructuring its business has to be disregarded when assessing the viability of the business. The main question in dispute was the extent to which the restructuring of the group rather than of the tenant itself had to be ignored. Cineworld argued that the Act only requires the restructuring of the tenant’s business and/or the possibility borrowing by the tenant itself. It was argued that if one only disregarded those parts of the overall restructuring that directly affected the tenant’s business but took into account the restructuring of the wider group, the business of Cineworld Cinemas Ltd and its subsidiaries would be viable.
The arbitrator accepted the argument on behalf of Royal London that it was really impossible and unrealistic to separate out the restructuring of the wider group from restructuring of the tenant and its subsidiaries. The restructuring was being proposed as a single package and the restructuring of e tenant could not happen in isolation. The tenant would be guaranteeing the parent company’s borrowings under the restructuring (approx. $1.4 billion) and it was likely that the tenant would itself be borrowing from the parent. In addition, each of the Cineworld companies had committed to enter into a “Real Estate Plan” for the reduction (consensual or otherwise) of obligations under occupational leases. Even if one only ignored the restructuring of the tenant itself, that would mean accepting that debts owed by the tenant, including London Trocadero’s judgment debt and rent under its other leases, would be immediately due, and the tenant would be unable to pay. But for the prospect of the group restructuring and the Chapter 11 protection obtained by the tenant (which on Cineworld’s argument would have to be ignored in so far as it related to the tenant itself), the tenant would be wound up on Trocadero’s outstanding winding up petition.
The arbitrator further held that, in any event, the very sparse evidence adduced by Cineworld Cinemas Ltd was inadequate to discharge the burden of showing that its business was viable.
As the main thrust of the argument and the decision was that the only hope of viability rested with the success of the overall group restructuring, the Chapter 11 proceedings and whatever implementation measures were taken in the UK, the dismissal of the arbitration reference is likely to have a wider impact given that various Cineworld companies have made 25 other arbitration references under the Act, 7 of which involve Cineworld Cinemas Ltd or its subsidiaries.
Cineworld Cinemas Ltd v The Royal London Mutual Insurance Society Ltd Chartered Institute of Arbitrators case no. DAS-01400-H6D8R. Award dated 19 May 2023.