A strange new beast in the forest

The case of Clarence House v National Westminster Bank [2009] EWCA Civ 1311 deals with a relatively new form of transaction that seems, at present, to be confined to City property transactions. I report it here because it may become more widespread.

This new beast is the virtual assignment. The idea is a simple one: a tenant, usually one who is also a landlord of sub-tenants, by a contract assigns all the economic rights and obligations of their lease to a third party, without actually assigning the lease itself. Most modern commercial leases prohibit (at least without consent) the assignment of the lease; parting with or sharing possession or a declaration of trust of the lease in favour of someone else. A virtual assignment is designed to side-step these prohibitions.

This is what National Westminster Bank had agreed with a Gibraltarian company New Liberty Property Holdings Ltd, their lease having the usual assortment of prohibitions against assignment etc.

Clarence House was rather unhappy about this, as Ward LJ put it:

Who was this unforthcoming Gibraltarian company who had been foist upon it without its knowledge or consent in place of its approved tenant, a copper-bottomed high street bank? The respondent made plain how unhappy it was dealing with the interloper, especially in the light of the disconcerting fact that since its involvement, the rent was in arrears. Their concerns could not be assuaged. Their concerns were not without foundation. We have now been informed that on 28th October Provisional Liquidators of New Liberty were appointed.

They applied to the High Court for a declaration that the virtual assignment was a breach of the terms of the lease as being a parting with or sharing of possession or a declaration of trust. The judge found for National Westminster, the Court of Appeal dismissed Clarence House’s appeal.

Clearly National Wesminster were not in literal possession of the premises (it was sublet) and so could neither share possession nor part with it, but landlord and tenant lawyers use the term “possession” more broadly. In particular s.205(1)(xix) of the Law of Property Act 1925 defines possession to include “receipt of rents and profits or the right to receive the same, if any”.

The Court rejected the suggestion that New Liberty were in receipt of rents for two reasons: the first was that they received the rents as agents of the landlord and, although they immediately became the property of New Liberty (as a result of the virtual assignment) there was an instant of time when they were not. I confess I am unhappy with an argument based on a scintilla temporis. Much better, in my view, was the second reason which was that it is entirely possible to assign the chose in action representing the right to receive rents while retaining the reversion: it is the latter, not the former, on which s.205(1)(xix) bites and which represent possession in the technical legal meaning of the word. Thus New Liberty were never in possession and so possession could not have been shared with or given to them.

The Court also took the view that a virtual assignment is not a trust. Ward LJ puts it thus:

I recognise that Virtual Assignments are strange new beasts in the forest; that one must circle around them suspiciously and cautiously; but the moment one gets close and has a good sniff, the overwhelming smell is of contract, not trust. Although the judge would not for a moment have expressed himself in such an inelegant way, so lacking jurisprudential precision, this was the central finding on this point and he was correct in that conclusion.

That must, I think, be right.

Posted in Housing law - All, Trusts and Estoppel and tagged .

2 Comments

  1. Clearly there will be a new clause in many commercial leases going forward. A prevention of parting with the rights and profits granted under the lease I suppose.

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