A High Court decision last week has given some comfort to landlords concerned about so called "virtual assignments" by their tenants, but will give concern to tenants (and their funders) who have entered into such schemes. These schemes were particularly prevalent in some of the large corporate outsourcing transactions of recent years.
Virtual assignments are used by tenants for a number of reasons, including complex group arrangements for financial and operational efficiency in circumstances where landlord's consent may be delayed or is not likely to be forthcoming. With a virtual assignment the legal tenant remains the same (and ordinarily the landlord would continue to receive rent from that entity) but the economic burdens and benefits of the tenant under the relevant lease, (including the entitlement to underlease income) passes to the assignee without any formal legal assignment.
Landlords have been concerned about virtual assignments because they may undermine the landlord and tenant relationship, with the landlord losing control over approving the identity of the party ultimately entitled to the economic benefit of the lease. Depending on the underlying structure used, rent from any undertenant may be payable to the virtual assignee, which may of course compromise the tenant's ability to pay rent and observe the lease covenants.
The High Court decision last week in the case of Clarence House Limited v National Westminster Bank PLC gave some comfort to landlords on this issue. The ruling in that case was that a virtual assignment breached the tenant covenant not to part with or share possession of the premises, because possession denoted a degree of physical control, including the right to the receipt of rents and profits (section 205 Law of Property Act 1925).
Tenants (and their funders) who have entered into virtual assignments will need to assess the risk of possible action for damages or forfeiture by the landlord.They may need to consider whether to apply for retrospective consent or to unravel any existing arrangements.
This decision has confirmed that a virtual assignment may breach the usual alienation covenant not to part with possession and offers further issues for consideration by both landlords and tenants operating in the current difficult market conditions.