This page deals with:
See also the pages dealing with Consents and the Landlord and Tenant (Covenants) Act 1995 in this section of the site.
- The exercise of rights after assignment.
- The importance of registering the assignment where it is required by 2002 Act.
- Virtual assignments.
Exercise of rights after re-assignment
BP Oil UK Ltd v Lloyds TSB Bank plc
 EWCA Civ 1710.
A party to a lease with the benefit of an option agreement (a put option) in relation to a lease, who had assigned the lease, could after taking back the lease, exercise the benefit of the option agreement. There was nothing in the agreement that prevented it from doing so. Arden LJ at para 15:
"In the present case, the option is contained in a document which is separate from the lease. It confers an option on the assignee as against the assignor. The landlord is not involved. Moreover, the option holder is described as "the Purchaser" and not by any expression which would restrict its capacity to that of tenant under the lease. If the position had been otherwise, it would clearly be arguable that its status was limited to its status as assignee pursuant to the assignment to it by Lloyds ... I have already found that clause 12 has the meaning explained above. It would not be justified to add to that meaning. On this basis, the put option did not cease to be exercisable on a permanent basis when the lease ceased to be vested in the oil companies. At that point, it ceased to be exercisable but it became exercisable once again when the lease was revested in the oil companies. The indications are that the parties did not contemplate that the Purchaser would assign the lease and then take a re-assignment back to itself. However, by the same token, the parties have not included the provisions necessary to prevent that happening."
Failure to register assignment
E.ON UK plc v Gilesports Ltd
 EWHC 2172
The case concerned premises let by a head-landlord (L) to a head tenant (T). The premises were sublet a sub-tenant (ST). The sub-lease contained a group company sharing provision, and the premises were occupied by OCS (a group company).
The head-lease contained a covenant in standard terms requiring the landlord’s consent to assign, such consent not to be unreasonably withheld. The sub-lease contained a covenant in standard form requiring the sub-tenant to comply with the terms of the head lease. It also contained a covenant obliging the sub-tenant to obtain the necessary consents to an assignment. Further, it incorporated the provisions as to notices contained in s196 of the Law of Property Act 1925.
An application was made to L’s agents for consent to assign the sub-lease. In due course a draft licence was provided to ST’s solicitors by the solicitors for L. It then became apparent that neither L nor ST had contacted T. At this point ST sent an email application for consent to assign to T. Eleven working days later the assignment was effected without T’s consent. The assignee subsequently went into administration. One of the issues was whether the assignment was effective to assign the benefit and burden of the sub-tenant's covenants in the sublease given that the assignment was not registered at the Land Registry?
At the time that the sub-lease was granted it was not registrable. However, due to the subsequent enactment of the registration provisions of the Land Registration Act 2002 (s.6) the assignment of the sublease was registrable. Further s7 provides that if registration is not effected within 2 months then the transfer is void (para 71). The original sub-tenant therefore remained liable for performance of the sub-tenant covenants.
As it was decided that ST was not the "former" sub-tenant but the current sub-tenant, it remained liable under the sub-tenant covenants of the sublease for payment of rent. Section 17 of the Landlord and Tenant Covenant Act therefore did not apply, and the sub-tenant’s liability was accordingly not restricted (paragraphs 76-79).
The mere fact that a lease is assigned in breach of covenant does not make the assignment ineffective (Old Grovebury Manor Farm Ltd v W Seymour Plant Sales and Hire Ltd (No2)  1 WLR 1397). However, if the assignment needs to be registered, failure to register will make the transfer ineffective.
Is a "virtual assignment" a breach of the alienation covenant?
Clarence House Limited v National Westminster Bank plc
 EWCA Civ 1311
By entering into a "Virtual Assignment" of leasehold premises, the tenant of those premises did not act in breach of the standard-form alienation covenants contained in the lease under which the premises were held.
The judge explained what was meant by a "virtual assignment". The definition was adopted in the court of appeal:
"A 'virtual assignment' is an arrangement under which all the economic benefits and burdens of the relevant lease (including any management responsibilities) are 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. It is typically employed where the relevant lease contains covenants against assigning or parting with the possession of the demised property without the consent of the landlord, and there are concerns either that the landlord may be unwilling to consent to a legal assignment of the lease because of perceived concerns about the financial standing of the assignee, or that the landlord's consent may not be available in advance of the scheduled date for completion of the transaction."(See further para 2 of the CA judgment).
National Westminster Bank plc ("the tenant") was the tenant of office premises, under the terms of a lease for a term of 25 years from 25 December 1985. The lease contained the usual covenants restricting alienation, including: (1) not to execute any declaration of trust with regard to the property or any part thereof or the lease: (2) not to share or permit sharing of possession or occupation of the property or any part thereof or part with possession or occupation of the same; (3) not to underlet the whole of the property or permit the creation of any derivative underlease without the landlord's prior written consent; and (4) not to assign the property without the landlord's prior written consent.
The whole of the property was underlet, with landlord’s consent, in 2001 to an undertenant for a term expiring on 21 December 2010.
In June 2005, the tenant entered into a document termed a ‘Virtual Assignment’ with a 3rd party and granted that 3rd party a power of attorney to act on the tenant’s behalf in relation to the demised property. The landlord was not informed of these arrangements, nor was its consent sought.
Eventually the landlord discovered the existence of the virtual assignment and commenced proceedings for a declaration that the virtual assignment breached the alienation provisions within the lease and for an inquiry into damages.
Appeal allowed. The virtual assignment was not a breach of the covenant. Ward LJ, giving the judgment of the court, stated that whilst the virtual assignment operated to pass the economic benefits and burdens of the lease and underlease, it did not transfer to the 3rd party any proprietary right or interest in the premises whatsoever and in particular, did not give the 3rd party any contractual or occupational right in relation to the premises. Ward LJ at para 16:
"… as its clever name suggests, we are dealing with what is virtually an assignment – almost an assignment but not quite."The virtual assignment did not result in a transfer to the third party of the right to receive rents in the sense envisaged by the Law of Property Act; only T was able to take any steps on failure to pay by the sub-tenant. The virtual assignment did not alter the underlying relationship between T and L, or transfer to the 3rd party any proprietary right or interest in the premises. T continued to be both tenant under its lease and landlord under the lease to the sub-tenant; the virtual assignment was not in fact an assignment - it merely mimicked the economic result of one without changing the legal position in relation to third parties.
Referring to Neuberger LJ in Akici v L R Butlin Ltd  EWCA Civ 1296 as “the master in this field”, Ward LJ went on to find that as T was not in possession of the premises at the time the virtual assignment was entered into (because it had previously underlet with consent); it therefore had no right to exclude all others (physically) from the premises and equally could not be said to have parted with or shared possession of the premises by virtue of the virtual assignment. Further, the 3rd party was never in legal possession of the premises in the sense that, given the presence of the sub-tenant, it did not have the requisite factual possession and intention to possess. Ward LJ at para 40:
"NatWest did not, by entering into this Virtual Assignment share possession or part with possession of the demised premises or any part thereof."Ward LJ went on to conclude that, as a matter of construction, the virtual assignment did not amount to a declaration of trust with regard to the demised property nor did it amount to a breach of the covenant against assignment.
Back to top