Clarence House Ltd v National Westminster Bank Plc

A virtual assignment transfers economic benefits and burdens without necessarily transferring a legal or equitable estate. It does not ordinarily amount to an underletting or an assignment where the lease prohibits only those specified forms of alienation. Nor does it necessarily create a trust merely because the transferee receives the economic benefit of the lease. However, an arrangement under which the tenant transfers control of the property, management of dealings with landlords and undertenants, and the right to receive rents and profits may constitute a parting with, or sharing of, possession. Lease covenants distinguishing possession from occupation should be given effect according to their language.

The claimant, as landlord, sought a declaration and an inquiry into damages arising from the defendant tenant’s entry into a virtual assignment of office premises and an associated power of attorney in favour of New Liberty Property Holdings Ltd. The arrangement transferred the economic benefits and burdens of the lease and an existing underlease, including management responsibilities and rental income, while the defendant remained the registered tenant and New Liberty did not occupy the premises.

The lease prohibited declarations of trust, sharing or parting with possession or occupation, underletting and assignment without consent. The preliminary issue was whether the virtual assignment breached any of those alienation covenants.

1. Underletting. The virtual assignment was neither in form nor substance an underletting. It reserved no reversion to the defendant and therefore did not breach the covenant against underletting.
2. Assignment. The covenant against assignment ordinarily covered only a legal assignment in the relevant context. There had been no legal assignment, and a registered leasehold assignment would in any event require registration. The fact that the lease separately prohibited declarations of trust did not expand the meaning of assignment. The express specification of several forms of alienation indicated that other forms should not be implied. The court applied the approach to standard lease covenants discussed in Akici v L R Butlin Ltd, [2005] EWCA Civ 1296.
3. Trust. The virtual assignment created a contractual relationship rather than a trust. The defendant was not constituted trustee of the property for New Liberty. In particular, New Liberty did not possess the powers and rights characteristic of a bare trust, including the ability to direct an end to the trust under the rule in Saunders v Vautier, (1841) Cr & Ph 240.
4. Possession. The covenant against sharing or parting with possession was breached. Section 205(1)(xix) of the Law of Property Act 1925, although statutory and subject to context, reflected the established property-law concept of possession as including receipt of rents and profits or the right to receive them. The virtual assignment transferred to New Liberty the economic benefits of the lease and underlease, the right to rental income, and responsibility for dealings with the landlord and undertenant. New Liberty was thereby to deal with the property as the defendant otherwise would have done, while the defendant no longer retained the right to do so. That amounted at least to sharing, and in substance to parting with, possession.
5. The court therefore determined that the defendant had breached the alienation covenants in clause 4 and paragraph 30 of the fourth schedule to the lease. An inquiry into damages was directed, with further submissions on its conduct and costs.

The judgment records that Master Price ordered, by consent on 19 November 2008, a trial of the preliminary issue of liability, with directions on damages to follow if liability were established.