Virtual Assignments Survive
18 December 2009
The reserved decision of the Court of Appeal in the case of Clarence House v National Westminster Bank has recently been published and will be of interest to commercial landlords and their tenants.
The Court of Appeal has allowed the tenant’s appeal and so decided that a “virtual” assignment of a lease does not breach a covenant against parting with or sharing possession or occupation of premises.
A 'virtual assignment' is an arrangement under which all the economic benefits and burdens of a lease (including management responsibilities) are transferred to a third party, but there is no deed of assignment of the lease itself nor any change in occupation of the premises. It is often used where the landlord may be unwilling to consent to a legal assignment of the lease or where the landlord's consent may not be available before the desired completion date for the transaction. However it can also be a means of removing lease liabilities from the balance sheet, enabling capital to be released to be invested elsewhere in the assignor's business as property risks are transferred to a third party.
The Court of Appeal also confirmed that a virtual assignment would not breach the usual tenant’s covenants against assigning or under-letting the premises or holding them on trust.
The result of this decision is that many existing commercial leases will not prohibit a virtual assignment and to do so in new leases will require explicit drafting.