What is virtual assignment?

CATHERINE ABBOTT, head of the property department at Gotelee & Goldsmith, examines the “virtual assignment” of leases and whether landlords need be concerned

A LEASE will generally include provisions which allow the tenant to assign, or transfer, a lease to a third party.

A carefully drafted lease will contain conditions for a tenant to satisfy before the lease can be assigned, most commonly to seek the landlord’s consent before proceeding.

The conditions are intended to give landlords a degree of control before the assignment of the lease proceeds.

A “virtual assignment” is an agreement made between a tenant and a third party (usually a company and referred to below as a “virtual assignee”) to transfer the “economic benefits and burdens” of a lease to the virtual assignee, without transferring the lease itself.

It can be an effective way of dealing with, for example, portfolio sales where co-ordinating landlords’ consent within a timetable can otherwise be difficult.

Many leases do not prevent a tenant from entering into a virtual assignment, leaving the tenant free to do so and by-passing the requirement to seek the landlord’s consent.

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If you are a landlord, do you need to be concerned that your lease may be virtually assigned?

The outcome of the recent case of Clarence House Ltd v National Westminster Bank plc 2009 (Clarence House) regarding a virtual assignment would suggest that no, you should not.

The tenant remains bound by the obligations in the lease and the landlord, ultimately, retains control until the lease is formally assigned or it otherwise comes to an end.

In the Clarence House case, the appeal judge found that:

n The tenant was not guilty of a breach of the assignment provisions in the lease;

n The tenant had not parted with possession (in this case, the virtual assignee had no right to occupy the premises as they had been underlet); and

n The fact that the virtual assignee was in receipt of rents and profits did not amount to possession.

A virtual assignment can be an attractive proposition for tenants, particularly corporate tenants, in that they can quickly and easily remove the liabilities of a lease from the company balance sheet without the need for landlord’s consent.

They can also remove property management responsibilities to a third party.

Please contact Gotelee & Goldsmith’s commercial property team for advice on 01473 294114 or email catherine.abbott@gotelee.co.uk .