In this recent case, the courts considered "virtual assignments", a form of outsourcing device whereby a tenant transfers the economic benefits (such as the collection of rent from sub-tenants) and burdens (such as payment of rent), together with management obligations, under its lease to a third party without getting the landlord’s consent.
by Beverley Vara
28 January 2010
In this recent case, the courts considered "virtual assignments", a form of outsourcing device whereby a tenant transfers the economic benefits (such as the collection of rent from sub-tenants) and burdens (such as payment of rent), together with management obligations, under its lease to a third party without getting the landlord's consent. The lease itself is not assigned, nor is there a change in occupancy. Such arrangements are used for example where a landlord's consent cannot in practice be obtained before a scheduled completion date because it is part of a large outsourcing deal involving many properties.
But does this arrangement fall foul of the standard alienation provisions contained in most leases? In January 2009 the High Court said that it did, giving tenants using this device considerable concern. In December however, they breathed a sigh of relief as the decision was reversed.
Clarence House was the landlord of office premises in Manchester. NatWest was the tenant. The lease contained standard alienation provisions preventing NatWest from subletting or assigning without consent, and from sharing or parting with possession or occupation.
In 2001, NatWest sublet to M (with consent). In 2005, NatWest assigned (without consent) the economic benefits and burdens under its lease to a third party, N, by granting N power of attorney and appointing it as its agent vis-à-vis all dealings with the premises (including paying rent to Clarence House and receiving rent from M). Upon discovering the arrangement Clarence House issued proceedings seeking a declaration that the arrangement constituted a breach of the lease.
What did the court say?
At first instance, the High Court held in favour of Clarence House. Although NatWest had not breached the covenants against subletting, assigning or declaring a trust, it had breached the covenant against parting or sharing with possession because it had given up control of the property, including the right to receive rent, which the Court held was part of the definition of "possession".
However, the Court of Appeal disagreed and held in favour of NatWest. "Possession" in this context means having the right to occupy premises to the exclusion of others (which M had, not N) and did not include the receipt of rent or the right to receive rent. Even if it had included the receipt of rent there was no breach because N received rent as agent for NatWest. If it included the right to receive rent (because N could keep the rents), there was no breach because N still had no proprietary interest in the lease.
What does this mean?
Landlords may want to consider with their legal advisers how to address this situation going forward, in particular whether they want to amend their alienation provisions. Tenants using this arrangement can relax but might check their lease and the facts carefully to see if they are in danger of any similar argument being run. If you have any concerns, you should take legal advice.
Beverley Vara is a partner and head of real estate litigation at Allen and Overy