The property world has been eagerly awaiting the outcome of a test case on virtual assignments (an arrangement under which all the economic benefits and burdens of a lease are transferred to a third party without any actual assignment or change in the occupancy of the premises).
The High Court ruled that by entering into a virtual assignment, a tenant had parted with or was sharing possession of its premises and was, as a result, in breach of its lease. The Court of Appeal has overturned that decision: Clarence House Ltd v National Westminster Bank plc [2009] EWCA Civ 1311; [2009] PLSCS 341.
The property world has been eagerly awaiting the outcome of a test case on virtual assignments (an arrangement under which all the economic benefits and burdens of a lease are transferred to a third party without any actual assignment or change in the occupancy of the premises).
The High Court ruled that by entering into a virtual assignment, a tenant had parted with or was sharing possession of its premises and was, as a result, in breach of its lease. The Court of Appeal has overturned that decision: Clarence House Ltd v National Westminster Bank plc [2009] EWCA Civ 1311; [2009] PLSCS 341.
The premises in question were occupied by a subtenant that remained in occupation throughout. However, the landlord did not want to deal with the virtual assignee in place of its approved tenant and was concerned that the rent had fallen into arrears following the virtual assignment. Its concerns were well founded; the virtual assignee is being wound up.
The Court of Appeal accepted that the virtual assignee had not acquired any proprietary right or interest in the premises and was not entitled to occupy them. The proper meaning and cornerstone of the arrangement was agency. The virtual assignee had been appointed to act as the tenant’s agent in respect of the property, to enable it to take the economic benefits of, and to assume responsibility for managing, the property. The tenant remained the tenant under its lease, and the landlord under the sublease, and the legal relationships between the parties had not changed.
Their lordships refused to accept that the tenant had parted with or shared possession of the premises. They rejected the argument that section 205 of the Law of Property Act 1925 defines “possession” as including receipt of rents and that the virtual assignee was in possession of the premises because it was entitled to collect rent from the subtenant. The virtual assignee did so as the assignee of a chose in action – and not because of any proprietary right or interest in land or as the assignee of the lease.
The Court of Appeal also rejected assertions that: (i) the arrangement constituted a breach of the tenant’s covenant not to execute any declaration of trust in respect of the premises, because the parties had entered into a contractual, rather than an equitable, relationship; (ii) the covenant against underletting had been breached, on the ground that the virtual assignment did not reserve any reversion to the virtual assignor; (iii) the tenant had assigned the premises, because the lease had not been legally assigned to the virtual assignee.
It is not yet clear whether the decision will be appealed. None the less, the ruling is likely to boost the confidence of tenants that were unsure about the legality of virtual assignments. It may also alleviate landlords’ concerns about their effect, given the Court of Appeal’s ruling that the virtual assignment did not alter the underlying relationship between the parties in the instant case.
Allyson Colby is a property law consultant
