Virtual assignments are still commonplace in large corporate transactions. For instance, if a seller has dozens of leasehold properties it may not be practical to apply for consent to assign for each property before completion of the deal. Formal consent will often only be applied for after completion of the transaction, with a virtual assignment being used as a stop-gap until the formal consent of L is obtained. On other occasions, no formal consent will ever be obtained and the parties will simply rely upon the virtual assignment.

The idea of a virtual assignment is that it allows occupation rights to be transferred to a third party without getting L’s consent. Typically, it will be a device used in the hope that T can avoid having to apply to L for consent, and then probably having to enter into an Authorised Guarantee Agreement (AGA). But, the case of Clarence House [2009], noted in our May [2009] issue, p17, makes it clear that such a device is unlikely to be effective. In that case, it was argued that the virtual assignment was in breach of four covenants: (i) not to execute any declaration of trust with regard to the premises; (ii) not to sublet the whole; (iii) not to assign; and (iv) not to part with or share possession or occupation. It was held that the virtual assignment was not a breach of (i), (ii), or (iii), but it was a breach of (iv), which prohibited sharing or parting with possession. In the judge’s view, ‘possession’ has a broader meaning than mere physical control and presence of someone on the premises; by analogy he referred to LPA, which defines possession as including ‘receipt of rents and profits or the right to receive the same’, as justifying him taking the view that ‘possession’ should be interpreted in a wide way. In practice, it is now difficult to see how any virtual assignment can avoid being in breach of a covenant against parting with or sharing possession of the premises.

Perhaps a more fundamental question is whether L should care about there being a virtual assignment (providing L still gets the rental income)? The answer is that L will be at risk if there is a split between the party obliged to pay the rent, and the party entitled to receive income from the property if it is sublet. Some variants of virtual assignments provide that this income will go to the virtual assignee, not to T. If T no longer has that income stream, and the virtual assignee fails to pass the rent on to T, then the rent owing to L may not get paid. Plus, of course, L will have no contractual relationship with the virtual assignee, and T may not have any assets at that stage, which will then make it difficult for L to recover the rent. In practice, many Ls take the view that those are theoretical risks and they will take a chance (given the current falling market). Moreover, if the covenant strength of the virtual assignee is acceptable, then the best advice to L may simply be to formalise the arrangement (ie make the virtual assignee take a legal assignment of the lease so there is a direct contractual relationship with L).

For more on this see our May [2009] issue (p17) and also an article on Clarence House v NatWest [2009] EWHC 77 (Ch) (access free at www.practicalconveyancing.co.uk) in [2009] NLJ 1465.