Virtual assignments, as a concept, have now been tested in the Court of Appeal and the earlier decision of the High Court, that they breached a standard covenant not to underlet hold on trust or share or part with occupation or possession of the property, reversed.
Virtual assignments have evolved to meet concerns either that a landlord may be unwilling to consent to a legal assignment or that the issue of consent by the landlord will not coincide with the timing requirements for the rest of the transaction.
In a virtual assignment the economic benefits and burdens of a lease are transferred to a third party but without any actual assignment of the lease itself.
In Clarence House Limited v National Westminster Bank PLC  EWCA Civ1311, neither the tenant (NatWest), nor the third party (New Liberty) were in actual occupation of the property as it had been sublet to an unconnected party. The case therefore 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.
The key feature for the appellate court was the appointment of New Liberty as agent of NatWest. When New Liberty collected the rent due from the under-tenant of the property it did so on behalf of NatWest; if the under-tenant failed to pay rent due, only NatWest had the right to sue. Accordingly NatWest had not parted with possession or shared possession of the property with New Liberty.
Again, in rejecting that NatWest held the property on trust for New Liberty, the agency arrangement between the parties was considered key; New Liberty assumed management responsibilities for the property not simply the benefits of the property.
This analysis should be helpful to both landlords and tenants in the continued use of the mechanism.
Tips for landlords:
- Be proactive - monitor tenant activity.
- Don’t ignore the warning signs - if you receive correspondence or payments for another entity, make enquiries, and reiterate the terms of the lease to your tenant. This should preclude argument by the tenant that you have acquiesced in any breach, and have therefore waived any right to forfeit the lease.
- Where the covenant strength is acceptable, formalise the arrangements - make the virtual assignee take a legal assignment of the lease, so that you have a direct relationship with them.
- Use the Law of Distress Amendment Act 1908 if arrears arise to recover rent direct from the subtenants.
Tips for tenants:
- Consider the terms of any “virtual assignment” carefully; ensure properties can be removed if the subject of challenge and make exceptionally clear that the arrangement is a contractual one only.
- If it is necessary to pass rights or obligations on to a third party, be as prescriptive as possible, and make it clear that the tenant is not parting with or sharing possession of the property, or holding the property on trust, but rather imposing an agency arrangement.