Clarence House Ltd v National Westminster Bank Plc

JurisdictionEngland & Wales
JudgeLord Justice Ward,Lord Justice Jacob,Mr Justice Warren
Judgment Date08 December 2009
Neutral Citation[2009] EWCA Civ 1311
Docket NumberCase No: A3/2009/0304
CourtCourt of Appeal (Civil Division)
Date08 December 2009

[2009] EWCA Civ 1311




HHJ Hodge (Sitting as a Judge of the High Court)

Before: Lord Justice Ward

Lord Justice Jacob

Mr Justice Warren

Case No: A3/2009/0304


Clarence House Limited Claimant
National Westminster Bank Plc Defendant

Mr Christopher Nugee Q.C. and Mr Julian Greenhill (instructed by Linklaters LLP) for the appellant

Mr Jonathan Gavaghan (instructed by Brian Drewitt Solicitors) for the respondent

Hearing dates: 13th and 14th July 2009

Lord Justice Ward

Lord Justice Ward:


The issue in this case is whether by entering into a “Virtual Assignment” of leasehold premises, the tenant of those premises acts in breach of the standard-form alienation covenants contained in the lease under which the premises are held. On 23rd January 2009 His Honour Judge Hodge Q.C. sitting as a judge of the Chancery Division, declared that it did but only because the tenant either parted with possession or was sharing or was permitting the sharing of possession of the premises. He ordered an inquiry into damages. Jacob L.J. granted permission for this appeal.


For those who do not gambol in this arcane field and have not previously encountered a “Virtual Assignment”, let me endeavour to explain what it is. I cannot do better than repeat the judge's description:

“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.”

It has other uses: it can be employed as a means of removing lease liabilities from the balance sheet; capital can be released to be better invested elsewhere in the assignor's business; property risks can be transferred to a third party; the assignor's property liabilities can be more closely aligned to business needs because surplus property can be vacated before the term of the lease expires. For these reasons the clever construct of a Virtual Assignment was invented by and has been deployed by commercial property lawyers in the City. They see the Virtual Assignment as “an invaluable mechanism which has facilitated a number of vital portfolio transactions for tenants without damaging landlords' interests. Reports of its death [a reference to this case] are premature. It is here to stay and the market should be grateful.” So wrote Anthony Burnett-Scott, partner of Ashurst LLP and Nicholas Cheffings, partner of Lovells LLP, in the Estates Gazette on 23rd May 2009 at p. 44. The respondent protests that Virtual Assignments may be “well-known to a handful of large City Law Firms acting for tenants with large property portfolios but they remain a device which is new and (so far) comparatively rarely used and untested between landlord and tenant.” This case will, therefore, decide its fate.


This Virtual Assignment was made on 10th June 2005 between New Liberty Property Holdings Ltd, a company registered in Gibraltar, which I shall call “New Liberty” and National Westminster Bank Plc (“NatWest”), pursuant to the Master Agreement made the previous day between the Royal Bank of Scotland Group PLC and New Liberty. The Master Agreement is a complicated document to which, fortunately, I need not make much reference. It deals with the disposal of a large portfolio of property both freehold and leasehold. The Virtual Assignment also covers many properties, some of which are “white leaseholds” where the virtual assignor is no longer in occupation and “grey leaseholds” where the virtual assignor remains in occupation. The material provisions are these:

2. Economic Benefit

The intention of the Virtual Assignment is to pass to the buyer [New Liberty] all of the economic benefits and burdens of the Leases and Underleases in respect of the Properties together with the obligation to manage all dealings with the Landlords and Undertenants as if the Properties had been assigned to the Buyer. Therefore any monies from any Under tenants pursuant to any Underleases, together with all proceeds for the surrender of any Underleases, shall belong to the buyer.

3. Indemnity

… The Buyer will from the Completion Date at all times duly pay to the Landlord in full all Rent on the relevant dates for payment under the Leases and will observe and perform all covenants and obligations contained, and will indemnify and keep the Seller indemnified against payment of all Rent and all costs, liabilities and claims arising out of any actual or alleged breach or non-observance of all covenants or obligations contained in [the Leases].

4. Dealings with Properties

… The Seller hereby irrevocably appoints the Buyer to be its agent to act on its behalf and in its name in all dealings connected with the properties. This will include but not be limited to:

4.1.1 paying all Rent due under the Leases including negotiating any rent reviews under the Leases; …

4.1.3 collecting and getting in all Rent due under the Underleases and negotiating rent reviews; …

4.1.7 negotiating and completing any surrender; …

4.1.8 dealing with any renewal of any Underlease …

4.1.9 negotiating and completing all assignments …

4.1.17 anything else related to the operation of the Leases and Underleases.

4.2 The Seller will not while this Virtual Assignment is in existence, do or attempt to do any of the things set out in Clause 4.1.

4.3 Neither the agency appointment in Clause 4.1 nor the Power of Attorney shall entitle the Buyer to do any of the following in the name of the Seller:

4.3.1 vary the Lease …

4.3.2 renew or re-grant … the Lease …

4.3.3 increase the Rent …

4.4. To enable the Buyer to perform its functions better, the Seller will provide at the cost of the Buyer:

4.4.1 confirmation to Landlords and Undertenants that the Buyer is acting on its behalf; …

and will agree themselves not to approach the Landlords or Under tenants …

4.5 The Buyer will not be entitled to use the name of the Seller in any litigation or other dispute resolution procedure in connection with any of the powers granted by the Seller under this Virtual Assignment without first obtaining the prior written consent of the Seller (which consent shall not be unreasonably withheld or delayed) …

8. Monies Paid and Received Under the Virtual Assignment

All monies paid and received by the Buyer under the Virtual Assignment (whether or not by way of Rent) will be to the account of the Buyer and the Seller will have neither any obligation to pay monies nor any right to receive monies (other than by reason of an Indemnity given by the Buyer in the Virtual Assignment) under or by virtue of the Virtual Assignment.”


On the same day NatWest executed a Power of Attorney in favour of New Liberty. By clause 2:

“[NatWest] hereby irrevocably appoints [New Liberty] to be its true and lawful attorney to do all acts and things on its behalf and in its name which [New Liberty] may consider properly necessary or advisable to effect or to give proper effect to the provisions of the Virtual Assignment … and deliver as its act and deed … [everything] properly necessary or acquired for any of the following purposes [namely the acts similar to those set out in clause 4.1 of the Virtual Assignment itself].”


The Lease with which we are concerned was a lease made on 3rd June 1986 between Sun Life Assurance of Canada as landlord and County Bank Ltd as tenant relating to a suite of offices being part of the ground and first floors of Clarence House in Manchester. The term was for 25 years commencing on 25th December 1985 and so expiring on 24th December 2010. The current landlord is Clarence House Ltd, the respondent to this appeal, and the current occupier is William M. Mercer Ltd (Mercers) to whom NatWest, the successor to the County Bank, underlet the entirety of the premises with the consent of the landlord for a term of years expiring on 21st December 2010, thus retaining a nominal reversion of 3 days. It is common ground that at no material time has NatWest been in actual occupation of any part of the property.


The alienation covenants in this lease are as follows:

“30. (1) Not to assign or charge the Demised Premises in any part less than the whole

(2) Not to charge the Demised Premises …

(3) Not to execute any declaration of trust with regard to the Demised Premises or any part thereof or these Presents

(4) Not to share or permit sharing of possession or occupation of the Demised Premises or any part thereof or part with possession or occupation of the same …

(5) Not to underlet any part or parts of the Demised Premises or permit the same to be underlet …

(6)(a) Not to underlet the whole of the Demised Premises nor permit the creation of any derivative underlease …

(8) Not to assign the whole of the Demised Premises …

(10) Not to assign, transfer, charge or underlet the whole of the Demised Premises or underlet parts thereof pursuant to paragraph 30(5) of this Schedule otherwise than in...

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