What is a virtual assignment?

Many large corporate occupiers of leasehold property transfer their rights and interests in a property to a third party, but not their leasehold interest. Often, the motivation for the corporate occupier is that they have not been able to obtain the landlord’s consent to an assignment or they wish to outsource the management of their portfolio to a third party. Many large corporate acquisitions contain such arrangements as an interim measure whilst the landlord’s consent is being obtained, or in such cases where there is a risk that the landlord’s consent would not be forthcoming, possibly because the purchaser was a new company with no track record. Such schemes allow occupiers to vacate earlier, to pass on the risks and liabilities of the lease and also to pass on the management of the property.  

The common name for such an arrangement is a “virtual assignment” and the general defi nition is that all the economic benefi ts and burdens of a lease (including any management responsibilities) are transferred to a third party, but not the leasehold interest. The occupier of the property does not need to change.  

A recent case  

The recent High Court case of Clarence House v National Westminster Bank PLC [2009] EWHC 77 (CH) brought such assignments into the spotlight. In this case, NatWest had entered into a virtual assignment with a company called New Liberty. Neither NatWest nor New Liberty occupied the property and it had been sublet by NatWest in 2001 by way of a lease expiring in 2010. New Liberty was granted a power of attorney to deal with the property on behalf of NatWest, effectively meaning NatWest stepped aside completely. When Clarence House, the landlord, found out about the arrangement, they brought proceeding against NatWest on the grounds that the alienation provisions of the lease had been breached.

The case turned on whether the virtual assignment resulted in NatWest sharing or parting with possession of the property, or holding the property on trust for New Liberty. In a fi rm decision, the High Court decided that NatWest had breached the covenant not to share or part with possession of the property. Although there has been no news of a possible appeal, this may not be the last we hear of this.

What this means for landlords

Landlords will usually be concerned with virtual assignments when the third party virtual assignee receives all the rental income from the property. If the tenant falls into arrears and the virtual assignee does not pass on the rental income, the landlord has no contractual relationship to enable them to pursue the virtual assignee. By this stage, the tenant may be worthless (particularly if the virtual assignment was part of a corporate acquisition) and the landlord would have to forfeit the lease. This means that virtual assignment can take away an important income stream from the tenant and thus the landlord.

How this affects tenants

Tenants will be concerned with the decision as it may result in their landlord looking at any virtual arrangements in closer detail. Current virtual assignments may be open to challenge by landlords and a landlord could threaten forfeiture. It is thus important that the virtual assignment can be terminated on short notice. Tenants may also need to consider approaching their landlord to either agree to a variation of the alienation provisions of their lease, or for retrospective consent to part with or share possession of the property.