Clarence House Ltd v National Westminster Bank Plc

A standard covenant against sharing or parting with possession bears its strict, technically correct meaning. Possession requires physical control and an intention to possess. Parting with possession requires the tenant’s complete exclusion from legal possession.

A virtual assignment transferring a lease’s economic benefits and burdens through agency and indemnity does not itself transfer possession, a proprietary interest or a contractual right of occupation. Collection of rent as the tenant’s agent does not confer possession, even where the agent may retain the proceeds.

Unless the lease requires a wider construction, a covenant against assignment prohibits legal assignment only. An arrangement creates neither a trust nor an underlease where it imposes contractual agency duties, confers no present right to demand the legal title, and creates no inferior estate or relationship of landlord and tenant.

National Westminster Bank Plc held a headlease of offices which it had underlet in their entirety. It entered into a virtual assignment under which New Liberty Property Holdings Ltd assumed the lease’s economic benefits, burdens and management responsibilities. New Liberty acted as the bank’s agent, supported by a power of attorney, but received no express legal assignment or right of occupation.

HHJ Hodge QC, sitting as a judge of the Chancery Division, declared that the arrangement breached the covenant against parting with, sharing or permitting the sharing of possession. He rejected allegations that it constituted an assignment, declaration of trust or underletting.

The bank appealed against the declaration. By respondent’s notice, the landlord sought to uphold the result on the rejected grounds. The central question was whether the virtual assignment breached any of the lease’s standard-form alienation covenants.

1. Appeal allowed unanimously. Ward LJ held that the virtual assignment did not breach any alienation covenant. Jacob LJ and Warren J agreed. The lower court’s order was set aside and the claim dismissed.

2. A standard covenant against sharing or parting with possession must ordinarily receive the strict, technically correct meaning established for that familiar form of commercial lease provision. Possession is characterised by physical custody and control, coupled with an intention to exercise that control for one’s own benefit. Its hallmark is the right to exclude others. Sharing possession therefore requires joint possession, while parting with possession requires the tenant’s complete exclusion from legal possession for all purposes.

   The bank had already divested itself of possession by granting the underlease. The undertenant alone occupied and possessed the premises. The virtual assignment did not change that position, so the bank could neither part with possession which it lacked nor share it with New Liberty.

3. The statutory extension of “possession” to receipt of rents and profits did not alter the result. New Liberty collected rent expressly as the bank’s agent and in the bank’s name. The rent was initially received for the bank, although it then became New Liberty’s money under the parties’ contract. The bank remained the person entitled to sue the undertenant for rent. Even an assignment of rent alone would transfer a chose in action rather than possession of the premises.

4. The arrangement transferred economic benefits and burdens but no proprietary interest or contractual right of occupation. It regulated dealings between the contracting parties without altering the continuing legal relationship between landlord and tenant.

5. No trust was created. The cornerstone of the arrangement was agency, and its active management responsibilities were inconsistent with a bare trust. New Liberty lacked a present right to compel transfer of the legal title because any assignment required the landlord’s consent and compliance with the lease covenants.

6. The covenant against assignment covered legal assignment only. Nothing in the lease’s detailed alienation provisions required an extended meaning. In any event, the virtual assignment created no present legal or equitable assignment.

7. The arrangement was not an underlease. It contained no demise for a term, created no inferior estate and established neither a landlord-and-tenant relationship nor privity of estate between the parties.

1. Court of Appeal (Civil Division): In [2009] EWCA Civ 1311, unanimously allowed the bank’s appeal, dismissed the respondent’s notice, set aside the order below and dismissed the claim.
2. Chancery Division: HHJ Hodge QC declared that the virtual assignment breached the covenant against parting with or sharing possession, ordered an inquiry into damages, and rejected the alternative allegations of assignment, trust and underletting. No citation is stated in the judgment.