| LANDLORD AND TENANT — Covenant — Possession, not to part with— “Virtual assignment”of leasehold office premises— Whether tenant breaching alienation covenants in lease by entering into virtual assignment
Clarence House Ltd v National Westminster Bank plc [2009] EWHC 77 (Ch); [2009] WLR (D) 22
Judge Hodge QC sitting as a High Court judge: Ch D: 23 January 2009
By entering into a “virtual assignment”of leasehold office premises, under which all the economic benefits and burdens of the relevant lease, including any management responsibilities, were transferred to a third party, but without any actual assignment of the leasehold interest or any change in the actual occupancy of the premises in question, the tenant acted in breach of the standard form alienation covenants contained in the lease.
Judge Hodge QC sitting in the Chancery Division so held when giving judgment for the claimant landlord, Clarence House Ltd, at the hearing of a preliminary issue to determine whether the defendant tenant, National Westminster Bank plc, had breached the alienation restrictions in the lease made between the parties’ predecessors in title by the virtual assignment dated 10 June 2005 to an offshore company, New Liberty Holdings Ltd (“New Liberty”). Pursuant to a licence granted by the claimant’s predecessor in title the defendant underlet the whole of the property to William M Mercer Ltd (“Mercer”) for a term of years expiring on 21 December 2010.
JUDGE HODGE QC said that, whilst the decision in Abbey National plc v Revenue and Customs Commissioners [2006] STC 1961 was a useful aid to understanding the concept of, and the commercial motivation for entering into, a virtual assignment, he derived no assistance from the decision in resolving the issues before him. The claimant submitted that the defendant was in breach of the restriction against sharing or permitting sharing of the property or had parted with possession of the same; that the possession of premises denoted an appropriate degree of physical control of those premises; and that the virtual assignment passed control of the property and Mercer’s underlease, from the defendant to New Liberty; alternatively, if the defendant retained some form of control over the property and Mercer’s underlease, it now shared such control (and thus possession) with New Liberty. The defendant submitted that New Liberty had no contractual or proprietary right to occupy the property, and it was therefore difficult to see how it could be said to be in possession; moreover, in so far as it affected the claimant, any activity carried out by New Liberty in relation to the property and the lease was in its capacity as agent for the defendant and not as an activity of New Liberty in its own right. His Lordship preferred the claimant’s submissions. By executing the virtual assignment, the defendant had either parted with possession of the property to New Liberty or, at least, was sharing, or permitting the sharing of possession of the property, with New Liberty. On the footing that the entire property was underlet to a third party, the effect of the arrangement was that New Liberty was to deal with the property as the defendant, as its head leasehold owner, would otherwise have been expected to deal with it, and the defendant no longer had the right to do so. That amounted to a parting with or sharing of possession. |
