Proceedings have been issued to forfeit WeWork’s lease in York Road on London’s Southbank. The proceedings may take some time to work through court, but they raise a number of issues of interest to landlords of WeWork properties or of other troubled tenants in cross border groups.
What happened?
2 Southbank Tenant Limited (an English company within the WeWork group) entered into a 20-year lease from 2019. WeWork Companies Inc (a corporation incorporated in Delaware USA) was guarantor. The lease of the premises contained a fairly typical forfeiture provision which allowed for re-entry on certain stated circumstances. Those circumstances included English law insolvency procedures for the tenant or guarantor and “any order or event occurring in any jurisdiction that is analogous to or has a similar effect or result to” the stated insolvency events. Despite the known difficulties of the group, 2 Southbank Tenant Limited is not in any insolvency procedure.
The guarantor went through a complicated restructuring under Delaware law, referred to in the pleadings as a “subsidiary merger and subsequent plan of division.” According to the pleadings, the original guarantor ceased to exist in July 2019 (6 months after the 20-year lease was signed) and the guarantee obligations transferred to one of the successor companies (referred to as “WWC-A”). WeWork’s case is that “As a result, as a matter of Delaware Law and/or construction of the Lease, [one of the successor companies] was thereafter the Guarantor under the Lease.”
On 6 November 2023, WWC-A (which had by then changed its name to “WeWork Companies US LLC”) went through a further re-organisation by which the guarantee obligations were transferred to a further successor company (referred to as “WWC-C”), while most assets were transferred to a company referred to as “WWC-B”.
WeWork argue that the re-organisation was not an insolvency procedure under Delaware law, and WWC-C remain as guarantor.
The problem with this position is that WWC-C may have a very different balance sheet and covenant strength to the original guarantor and could have been devalued by the successive re-organisations. It also leaves the landlord of a major London property occupied by a group with known financial difficulties.
What to do about it?
Whether the re-organisation in this case was “analogous” or of “similar effect” to an English administration will be of great importance to landlords of other WeWork leases with the same guarantor. However, it is likely to be specific to the facts of this case and so of limited significance to other groups with US guarantors.
However, there are some lessons which can be drawn from this to prevent difficulties of this nature applying in the future:
• Tailor your forfeiture clause for jurisdiction specific restructuring procedures: Restructuring procedures vary substantially from one jurisdiction to another. Particularly for more valuable leases, obtain legal advice on restructuring procedures to which the guarantor could be subject and draft forfeiture provisions to be triggered on the occurrence of these events. That is different to the pro-forma opinions generally obtained on the enforceability of contractual obligations. It would be a more specific piece of advice on the available restructuring procedures so that these can be drafted into the forfeiture clause as forfeiture triggers. That would remove the legal risk of relying on the procedure being “analogous” or of “similar effect” to an English procedure.
• Consider other security: This is a reminder that overseas guarantors may be difficult to enforce guarantee obligations against. Consider rent deposits and asset charges. It is noteworthy that the tenant in this case has no mortgages or charges registered against its assets. A charge over the lease may have offered other alternatives to recover the property.
• Consider net asset covenants: Borrowing a technique from lending transactions, stating financial covenants which need to be met at regular intervals may lessen the damage of reorganisations and offer early triggers for forfeiture.
• Monitor and use leverage: In many cases, confirmation of lease obligations may be requested after a re-organisation (and there were some suggestions that a confirmatory deed of guarantee was presented here). If asked to enter into a confirmation, landlords should take advice on the position and consider improvements in their security and forfeiture rights as a quid pro quo for their consent.
• Don’t delay: Many forfeiture cases can be prejudiced by delays or discussions which are deemed to be waivers of the landlord’s rights (as is argued here as part of WeWork’s case).
• Monitor the position: Require provision of regular financial information and review this carefully to assess the tenant or guarantor’s position – and any available enforcement rights.
• Section 123 insolvency: If there has been a diminution of the financial position of the tenant or guarantor, this may trigger “balance sheet insolvency” (effectively that liabilities exceed assets). That is a basis for deeming a company to be unable to pay its debts under section 123 Insolvency Act 1986, an event which is commonly part of a forfeiture clause and was in this case. It is not known if the landlord here is arguing that the guarantor is balance sheet insolvent. This can be difficult to prove without detailed financial information. This may, in itself, be a reason for demanding detailed financial information under the lease.
For landlords who have battled against tenants in administration, they will know that there are many obstacles. Navigating a way through the legal obstacle to forfeiture thrown up by the administration moratorium can be unpredictable, slow, and expensive. If it was found that the procedures used by the guarantor here were indeed analogous to administration, the court may have to decide the harder question of whether any moratorium created by the US procedures should be recognised in English proceedings. This all illustrates the care which needs to be taken in optimising the position where a foreign guarantor is offered for a high value lease.
However, there may be ways through the minefield. Take advice and act promptly.
