Following the July edition of our Real Estate Update, which you can access by clicking here, where we reported the High Court decision of Clarence House Limited v National Westminster Bank PLC, the Court of Appeal has now overturned that decision. The High Court ruled that a “virtual assignment” breached the usual tenant alienation covenant not to part with or share possession of the premises. This meant that virtual assignments were open to challenge by landlords and the landlord could threaten forfeiture. This would affect many outsourcing and other arrangements using the scheme.
The Court of Appeal applied a wider def nition than the High Court and ruled that parting with or sharing possession was giving up aspects of physical control and the word “assignment” included a right to exclude others. This was not the case in virtual assignment as it did not alter the underlying legal relationship between the landlord and tenant or transfer any proprietary right or interest in the premises to a third party to whom the virtual assignment had been made. Neither did the right to receive rents breach the alienation covenant as this was merely a contractual arrangement. An express assignment of rent cannot amount to sharing or parting with possession. The Court of Appeal concluded that the virtual assignment could not transfer any legal estate in the premises and it was a mere contractual arrangement.
The decision will be welcomed by tenants who have been using virtual assignments for managing group property arrangements, or where there are concerns over diff culties with obtaining landlord’s consent. It also provides some comfort to landlords who feared such schemes would alter the tenant/landlord relationship as the landlord has a cause of action against the tenant for non-payment of rent, whether as a claim or as a ground for forfeiture. Some draftsmen have altered their leases to prohibit virtual assignments on the basis that landlords are concerned about an underlease rent being diverted away from the tenant and the effect this may have on the tenant’s covenant strength. However, this is likely to be strongly resisted by tenants on the basis that a landlord should not have any control over what tenants do with their rental income.