The CA has made it clear that most virtual assignments will be valid (see Clarence House [2009] noted in our March issue, p19).

In Clarence House, T had sub-let the property. Both before and after the virtual assignment by T, it was the sub-T (and the sub-T alone) who was in ‘possession’ of the premises. T had parted with possession on the grant of the sub-lease and the CA took the view that it could not be said T had parted with ‘possession’ by simply making a virtual assignment.

In the CA’s view, the effect of the virtual assignment was that the virtual assignee was the agent appointed by T to collect sub-Ts rents. In collecting such rents he could say to sub-T ‘you must pay me the rent on behalf of L’ but he could not say ‘you must pay me the rent because you owe me the rent’. The virtual assignee had no right to sue the sub-T for the rents in its own name, and it did not matter that upon receipt of the rent the money became (under the terms of the virtual assignment) the property of the virtual assignee. In reality, the position of the virtual assignee was analogous to that of a management agent, the appointment of whom would not amount to a breach of the covenant against parting with or sharing possession (even if the managing agents were permitted to keep 10% of the rent). Thus, the conclusion of the CA was that a virtual assignment will not normally be a breach of the usual covenants (ie not to make a declaration of trust; not to create an under-lease; not to grant an assignment; not to share or part with possession).

One point that was not made clear by the CA is what would happen in the Clarence House situation (where the property was fully sub-let by T), when the sub-lease ended. If the virtual assignment allowed the virtual assignee to go into occupation in the absence of a sub-T, or possibly if the agreement provided for the virtual assignee to control the choice of the new sub-T, then it would seem that there would then be a breach of the alienation covenant (because the virtual assignee would have secured physical control and thus there would be a parting with possession). Accordingly, this is something to bear in mind when drafting a virtual assignment; you do not want a situation in which there is any suggestion of the virtual assignee being allowed into occupation, or being able to control the choice of the new sub-T, if an existing sub-lease comes to an end. For further discussion see article in [2010] NLJ 757.