Court ruling threatens 'virtual assignments' of property interests

OUT-LAW News, 02/02/2009

Companies which sign over the management of properties they rent without telling their landlord might be in breach of their leases after the High Court ruled in a landlord's favour in a dispute.

The Court said that National Westminster Bank (NatWest) was wrong to have let another company take charge of a property owned by Clarence House Ltd (CHL) using so-called virtual assignments.

An assignment transfers responsibility for a property to someone else. A tenant can assign the property to someone else but usually needs the landlord's permission to do that.

A practice has emerged to transfer control of a property without consulting the landlord using a 'virtual assignment'.

"A virtual assignment is not a full legal process, it is not an assignment, it is just a contract between two parties," said property law expert Allyson Colby of Pinsent Masons, the law firm behind OUT-LAW.COM.

CHL objected to NatWest's virtual assignment of a property to New Liberty Property Holdings Ltd, which had happened without its knowledge or approval.

It said that NatWest had underlet and assigned the property without its consent and had shared or parted with possession or occupation of the property, actions which were against the terms of the lease.

The Court said that it had not underlet or assigned the property, but that by giving control over it to New Liberty it had parted with or shared possession of the property in breach of the lease.

"Most commercial leases prohibit the tenant from assigning, or underletting, or parting with or sharing possession or occupation without the landlord's consent," said Colby. "Such restrictions often prove inconvenient in the context of property outsourcing arrangements, or on the sale of leasehold portfolios where time is tight and consents are required from a multiplicity of landlords. Hence, the use of a virtual assignment, which passes responsibility for premises to the virtual assignee without any legal assignment or change in occupancy of the premises."

But the High Court's ruling could make people structuring property deals shy away from using virtual assignments, said Richard Daffern, another property law expert with Pinsent Masons.

"Property lawyers have always said that there is a potential for a challenge with these," he said. "I suspect people will have to be more cautious."

Colby said that virtual assignment deals are often used in outsourcing deals and in corporate transactions. She said that this case "has important implications for landlords who are affected by virtual assignments and for tenants and third parties who have entered into them".

See: The ruling

Feedback | Printer-friendly page | Latest news | | All news feeds | Ask a lawyer