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Landlord and tenants should be aware of Virtual Assignments

Thursday 17th June 2010

What is a Virtual Assignment?

It is a contractual agreement between a tenant and a third party, under which the tenant’s obligations, as well as economic benefits and burdens, are transferred to the third party, without requiring the consent of their landlord.

Under the virtual assignment the assignee is required to pay rents due, and comply with all tenant’s covenants and obligations under the lease.  Usually this is in consideration for a management fee, either equal to or slightly higher than the rent.

The important feature of a virtual assignment is that occupation of the Property is not transferred to, or shared with, the assignee.

Why use a virtual assignment?

The majority of Leases prevent assignment without the Landlord’s written consent.  If a tenant is concerned that the Landlord will refuse consent, or if there is insufficient time to obtain the Landlord’s consent, they may consider a virtual assignment, either as a temporary or permanent measure.

There are a number of reasons for virtually assigning a lease, these differ depending on whether the tenant is currently in occupation or if the property has already been sublet to a third party.

Tenant in occupation:

• the property will be removed from the tenant’s balance sheet, as they are no longer responsible for rents; and
• to facilitate group transfers or restructure, when the assignment needs to occur quickly and a request for consent is likely to delay the transaction

Where Property is sublet:

There is the added benefit that the management of the property will be outsourced.  Here the assignee will collect rent from the subtenant and pay it on to the landlord.

Do Virtual Assignments require landlord’s consent?

Under Clarence House v National Westminster Bank, the Court of Appeal held that a virtual assignment did not breach the alienation clause in a lease.  As occupation of the property is not transferred, parted with, or shared, the restrictions on alienation need not be considered and the Landlord’s consent is not required.

The Court of Appeal decided that the assignee was acting as agent for the tenant.

What Tenant’s need to know

Whilst benefits and burdens under the lease may be assigned to the third party, a virtual assignment is a purely contractual relationship and does not terminate the tenant’s liability under the Lease.  The landlord would still pursue the tenant for non payment of rent or breach of covenant.  The tenant can protect against this via an indemnity from the assignee but as with any indemnity it is only good if the assignee can pay.

What Landlords need to know

Landlord’s may wish to consider a prohibition on virtual assignment without their prior written consent.  Before doing so there are a number of factors they should consider:

• A virtual assignment does not affect the landlord and tenant relationship, it is still the tenant whom the landlord would pursue for any non payment of rent or breach of covenant.
• The concept of a virtual assignment is very difficult to define in a lease and the landlord may inadvertently prevent a tenant from entering management agreements or rent factoring agreements, and from assigning rents as security for a loan.
• If restrictions in a lease are onerous it may have a negative impact on rent review.

The advisable course of action for a landlord is to require notification on any virtual assignment and to monitor the situation carefully, reacting to the first sign of the tenant being in financial trouble.

A virtual assignment is a contractual transfer of the benefits and burdens under a lease, without legal assignment of the lease.  They are primarily used where the property has been sublet and the tenant is looking to outsource the management responsibilities under the lease.  They will be equally as effective where a tenant is still in occupation but wishes to transfer the obligations under the lease to a third party, usually a group company or overseas company.

One note of caution is that virtual assignments are still relatively rare, and landlords and tenants are not always aware of them.  The uncertainty surrounding virtual assignments means that there is a chance that landlords may still take action for breach of the lease.

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"Virtual assignments": strange new beasts in the forest

A recent case (Clarence House Ltd v National Westminster Bank Plc 8 December 2009) looked at virtual assignments and provides useful guidance to the industry on the extent to which they amount to a breach of normal rack rent lease alienation provisions.

First of all, what is a virtual assignment? This is an arrangement under which all the economic benefits and burdens of a lease are transferred to a third party without any actual assignment or change in the physical occupancy of the premises. Virtual assignments are often used as a mechanism where it is believed a landlord’s consent to an assignment of a lease may not be obtained or will not be available in the timeframe required and have been used to facilitate large portfolio transactions.

In the recent Court of Appeal case, the premises in question were underlet to and occupied by a subtenant, with the landlord’s consent. The lease contained standard covenants against alienation. The tenant entered into a virtual assignment of the lease, whereby it transferred to a third party all the economic benefits and burdens of the lease and underlease, including management responsibilities, but without assigning the leasehold interest or changing the actual occupancy of the premises. The assignee was to pay the rent and perform all tenant covenants contained in the lease and the landlord’s covenants in the underlease. The tenant also appointed the assignee as its agent to collect the rent from the undertenant. The tenant also granted a power of attorney to the assignee enabling it to act in the name of and on behalf of the tenant in respect of the premises. The landlord was not informed of those arrangements and its consent was not obtained.

The landlord sought a declaration that by entering into the virtual assignment the tenant had breached the alienation provisions in the lease.

The Court of Appeal considered the various alienation restrictions. Firstly the Court found that the tenant had not shared or parted with possession of the premises. The characteristic of the right to possession was the right to exclude all others from the property in question. At the time of the virtual assignment the tenant was not (and had not been) in possession of the premises; the occupier and party in possession was the undertenant. The virtual assignment did not alter that situation and therefore the tenant could not be said to have parted with possession to the assignee or to have shared possession by entering into the virtual assignment.

Even if parting with possession was interpreted more widely to include the right to receive rents as in some real estate contexts it can (which the Court considered was the wrong approach here) there was still no breach. By collecting rent as agent for the tenant (in the tenant’s name), the assignee did not receive that rent for itself in the sense of putting it into possession of the premises. There was a purely contractual arrangement between the tenant and the assignee, which did not result in a transfer to the virtual assignee of the right to receive rents and profits.

The Court furthermore held that a virtual assignment was not a declaration of trust. The relationship between the tenant and the virtual assignee was a contractual one only. They considered that “virtual assignments are strange new beasts in the forest; that one must circle around them suspiciously and cautiously; but the moment one gets close and has a good sniff, the overwhelming smell is of contract, not of trust”.

Finally the Court determined that a virtual assignment was not an assignment or underletting. Therefore all in all the Court did not believe there had been a breach of the lease covenants.

It is not yet clear whether the decision will be appealed. However, the case is likely to boost the confidence of tenants, now that the legality of virtual assignments has been confirmed. It may also ease landlords’ concerns about the effect of virtual assignments, as the Court of Appeal ruled that a virtual assignment did not alter the underlying relationship between the landlord and tenant.

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What is a Virtual Assignment of a Commercial Lease in the UK?

By Clare Farmer

Updated on 30 June 2023 Reading time: 5 minutes

This article meets our strict editorial principles. Our lawyers, experienced writers and legally trained editorial team put every effort into ensuring the information published on our website is accurate. We encourage you to seek independent legal advice. Learn more .

• Actual Assignment  
• Virtual Assignment of a Commercial Lease in the UK 

Effect of a Virtual Assignment in the UK

Why complete a virtual assignment, key takeaways, frequently asked questions.

When a commercial tenant and landlord commit to a lease, the landlord is taken to have granted the tenant with the right to occupy their property. As a commercial tenant, you may occupy the premises for a specific period; this is referred to as the ‘lease term’. A commercial lease agreement is legally binding, so each party must abide by the lease provisions for the entire lease term. However, you may want to exit the lease agreement before the lease term elapses. One way would be to assign your lease to a new commercial tenant; a variation of this approach is to assign the lease virtually. This article will explain virtual assignment of a commercial lease in the UK.

Actual Assignment  

Lease assignment is where a commercial tenant, the assignor, transfers or sells their commercial lease to the assignee, a third party. The third party will typically be another business owner. The assignee will take over the current tenant’s lease obligations, and you, the previous commercial tenant, will no longer be a party to the lease. Consequently, if you are a tenant assigning the lease, your role in the commercial lease terminates. 

You will only incur lease obligations if the commercial landlord requires you to sign an Authorised Guarantee Agreement (AGA), which means that you will guarantee the new tenant’s lease obligations. Should the new tenant fail to adhere to these, you will be obligated to fulfil these obligations. You may hear others refer to this as an actual commercial lease assignment.

The actual assignment of a commercial lease will take place through either a transfer using a Land Registry form TR1 for registered leases or a deed of assignment for unregistered leases.

Virtual Assignment of a Commercial Lease in the UK 

You can also transfer the lease via a virtual assignment. This is different from the actual assignment of a commercial lease. 

Virtual assignment of a commercial lease in the UK is similar to actual assignment. However, via virtual assignment, the lease itself is not transferred, only the obligations of the lease. Under this arrangement, a contractual agreement forms between you and the incoming tenant. Notably, your current landlord has no say in the matter. Subsequently, for your virtual assignment of a lease to be valid, it does not require the consent of your landlord. Additionally, when you virtually assign a lease, you are not in breach of the alienation provisions in your current commercial lease agreement. 

The contract that you create through the virtual assignment of a lease transfers the leases:

• economic benefits;
• burdens; and 
• other obligations.

While you can conduct a virtual assignment by forming a contract with the proposed new tenant, you can also virtually assign a lease by creating a declaration of trust.

As such, when a virtual assignment takes place, the assignee has to comply with all the lease obligations, which include rental payments, as these form part of the new contractual agreement. Yet, because you have not transferred the commercial lease, you retain the right to occupy the commercial premises. The incoming tenant, the assignee, has no right to share the property or to fully occupy it. This also means that you still have liability under the lease. Consequently, should the assignee fail to pay rent, the landlord can request that you satisfy the debt.

Although the virtual assignment of a commercial lease is uncommon, you may wonder why you might choose this as opposed to actually assigning the lease. Typically, you would virtually assign a lease due to an assignment provision in the commercial lease agreement. If the assignment provision is particularly restrictive, you, as the commercial tenant, may bypass this by virtually assigning the lease. However, you should note that if a commercial lease prohibits virtual assignment, you should proceed with caution in deciding whether to enter the commercial lease or not. 

A further reason as to why you may choose to virtually assign the lease is because you fear your landlord may not give consent to the assignment or because the landlord sublets the business premises. If the landlord sublets the business premises, virtual assignment allows you to outsource the management role contained in your lease agreement. This means that the assignee will be responsible for the collection of rent from the subtenant and will then pass this on to the commercial landlord.

This cheat sheet outlines what you should be aware of in your lease agreement.

Virtually assigning a commercial lease is where you, as the commercial tenant, assign the lease obligations to a third party but not the lease itself. This is possible via a new contract with the third party, the assignee. This means that the assignee adopts the lease obligations but does not have a right to occupy the commercial premises. Only you, as the commercial tenant, retain this right. You will also be liable for the lease obligations in the commercial lease if the assignee fails to meet the same ones in the contract they have with you. Finally, you might choose a virtual assignment where your commercial lease has stringent assignment conditions.

If you need help understanding what the virtual assignment of a commercial lease in the UK is, contact our experienced leasing lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page .

Virtual assignment of a commercial lease is where a commercial tenant enters into a separate contract with an assignee, which requires the assignee to meet the same terms as the lease.

You may choose to virtually assign your commercial lease where your commercial lease agreement imposes strict conditions on the actual assignment of the lease, or you believe that your landlord may not consent to the assignment.

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'Strange New Beasts In The Forest' - The Impact Of Virtual Assignments On The Landlord And Tenant Relationship

Contributor.

Virtual assignments are a relatively new concept. Until recently their impact on the landlord and tenant relationship has been uncertain but the Court of Appeal in Clarence House Limited v National Westminster Bank Plc [2009 ] confirmed that virtual assignments do NOT amount to a breach of standard alienation covenants prohibiting assignment without consent, sharing or parting with possession or entering into declarations of trust in relation to premises.

What is a virtual assignment?

A virtual assignment is an arrangement under which a tenant agrees to transfer the economic benefits and burdens of a lease to a third party without effecting a legal assignment of the lease. A virtual assignment is useful to a tenant because it can also be used to transfer property management responsibilities to a third party and remove lease liabilities from the balance sheet - and so achieves the same economic result as an assignment without altering the underlying legal relationship between the parties. To date, such arrangements have principally been used in large real estate transactions or group re-structures. As one of the Court of Appeal judges commented, such arrangements are indeed 'strange new beasts in the forest'.

The facts of the case

National Westminster Bank Plc ('the tenant') was granted a lease by Clarence House Limited ('the landlord') and subsequently underlet the whole of the premises to William M Mercer Ltd ('the undertenant'). The tenant then 'virtually assigned' their lease to New Liberty Holdings Ltd ('the virtual assignee').

The material provisions of the virtual assignment included:

- the transfer of all economic benefits and burdens of the lease to the virtual assignee;

- an obligation on the virtual assignee to pay rent to the landlord and to observe and perform the tenant's covenants in the lease and to keep the tenant indemnified against liability for all rent, costs, liabilities and claims; and

- the appointment of the virtual assignee as the tenant's agent in all dealings connected with the premises including the collection of rent from the undertenant.

The virtual assignment did not transfer any proprietary, contractual or occupational right in relation to the premises. The landlord subsequently issued a claim for a declaration that the virtual assignment was in breach of the standard alienation provisions in the lease because it constituted one or more of the following:-

- a declaration of trust as between the tenant and the virtual assignee;

- an assignment between the same parties, without consent; and/or

- an arrangement under which possession of the premises was either shared or had been parted with

The Court of Appeal decision

1. Declaration of trust

It was held that although the virtual assignment was similar to a declaration of trust, it was a contractual arrangement under which the virtual assignee had been appointed as the tenant's agent and had acquired the economic benefits and burdens of the lease. It did not create a trust.

2. Sharing possession or occupation

It was held that possession was to be given its ordinary meaning ie the right to exclude all others from the premises. At the time of the virtual assignment the undertenant was in occupation of the premises and the virtual assignment did not alter this position. Since the tenant was not in occupation, it could not be said to have parted with or shared possession of the premises with the virtual assignee.

3. Assigning the premises

It was held that in the absence of any context showing that a covenant against assignment is to have an extended meaning, it only covers a legal assignment, not an equitable assignment, and as such the relevant covenant could not have been breached by anything other than a legal assignment – which the parties agreed had not taken place.

Impact for landlords and tenants

Tenants can use virtual assignments (unless there is an express prohibition in the lease) to avoid onerous alienation covenants. Such arrangements can be used to release lease liabilities from the balance sheet so that capital can be invested elsewhere. Since there is no need to obtain landlord's consent, virtual assignments will continue to be useful for large corporate tenants wanting to transfer a property portfolio, or as part of a group restructure.

From a landlord's perspective, it would appear that virtual assignments are 'with us' for better or for worse – they do not appear to impact on the landlord and tenant relationship (in that both parties remain liable to observe their obligations under the lease) but they do allow tenants to dispose of leases in a way which is outside the landlord's control ie the landlord loses the ability to assess the covenant strength of the proposed assignee.

Landlords may also be concerned about undertenant rent being diverted to a third party and the indirect effect this could have on a tenant's covenant strength (although it should be noted that the landlord's right to request payment of rent by an undertenant direct to the landlord, if the tenant is in arrears, would be unaffected).

Some commentators have suggested that the alienation covenants in leases could be drafted so as to expressly prohibit virtual assignments. Such an approach will need to be carefully considered as the relevant wording could be seen as an onerous provision at rent review - although to date such an argument has not reached the courts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Real Estate and Construction

United kingdom.

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Knowledge Hub for Growth

Assigning a commercial property lease to another business.

To grow or react to market conditions your business may need to quickly leave its current premises. If your business rents the premises but there is still time left to run on the lease, what can you do?

A common solution is to transfer your lease to someone else. This process is called ‘assigning a lease’. In this article, we describe how this process operates and what potential problems you may need to overcome. If you need help in this area, our friendly  commercial property experts  can help.

How to assign a lease

‘Assigning’ a lease simply means transferring your lease to another person so that they become the new tenant. Once the assignment has taken place the lease continues to exist and the new tenant becomes liable for all of the tenant’s obligations in the lease.

The first step is to find someone who may want to take over the lease (they are known as ‘the assignee’). Aside from being happy with the rent that is being charged, the assignee will want to review the lease to ensure that it does not contain any onerous or unacceptable terms. This process will be very similar to the one your solicitor carried out when you negotiated the lease in the first place, except that as the assignee will be taking over the existing lease, they will have little or no opportunity to change its terms and will have to be happy with it as it stands.

If the lease contains terms which are generally unacceptable in commercial property leases or terms that will affect the ability of the new tenant to use the property as they wish, you may have problems in assigning the property. It is worth knowing before you start marketing your lease just what it does or does not allow. For example, it is no good marketing a warehouse to factory owners if it specifically forbids industrial use.

Most tenants will want to carry out the same due diligence process as if it were purchasing a commercial property or negotiating the lease at the outset. This usually involves raising queries with the local authority and utility companies as well as finding out about environmental and similar issues. This takes time so do not expect to be able to transfer the lease instantly.

The second step, once an assignee is found and they are happy to take on the lease, is to transfer (‘assign’) the lease. This will be done using a  Land Registry form known as a TR1 . If the lease is for less than 7 years, then the lease can be assigned by using a deed of assignment. Both these documents have the same effect and will generally be executed by both you as the current tenant and the assignee.

You can assign your lease to whoever and whenever you like. Most landlords are not willing to allow the tenant such freedom and often write into the lease restrictions on to whom a lease can be assigned and on what basis. In most cases, the landlord will be required to consent to the assignment before it can go ahead. This is where most of the practical problems arise as we explore in more detail below.

When and why to assign a lease

A tenant will generally look to assign its lease when it no longer requires use of the property but there is still some time before the lease comes to an end. For example, your business may have taken a five-year lease, but after two years you need to move. Unless the lease includes  break clauses , you would have to continue to pay the rent and comply with the lease terms for the remaining three years of the lease term. By assigning the lease you can dispose of or at the very least reduce that liability. 

If there is less than a year remaining of the lease to run, it may be more difficult to find someone who wants to take the lease for a short period of time, so in those circumstances, it may be worth continuing to trade from the existing property until the lease comes to an end itself.

A few common examples of why you may wish to assign your lease are that:

• You may have agreed to sell your business and the structure of the transaction requires the lease to be assigned to the purchasers;
• Your business may not be trading as well as you had hoped and you are unable to keep up with rent payments or you may simply need smaller premises;
• You may find that the property is no longer situated in a convenient place and may want to relocate the business; or
• Your business may have grown faster than anticipated and requires bigger premises from which to trade.

Is a licence to assign needed to transfer a commercial lease?

A licence to assign is the document used to evidence that the landlord has granted its consent to an assignment as required. Most landlords are primarily concerned with the income they earn from the properties they rent out. It is important to them that the tenants they rent to:

• Are able to pay the rent in full and on time;
• Keep the property in a good state of repair so that the property can be easily relet when the tenant leaves; and
• Behave in such a way as not to adversely affect the landlord’s ability to rent other properties it may own nearby.

It is for this reason that most landlords will seek to control who you can assign your lease to and prevent you from assigning your lease without your landlord’s consent.

Do you need the landlord’s consent to assign a commercial lease?

Whether your landlord’s consent to an assignment (by way of a licence to assign) is required depends on the terms of the lease you are seeking to assign. Most leases will have some restrictions. It is only if the lease does not include any restriction on assignment or includes restrictions but no requirement to obtain the landlord’s consent to an assignment, that no licence to assign will be required.

Although the detailed provisions can look intimidating, most assignment clauses simply require the landlord to agree that it believes the assignee to be able to meet its obligations and if it does so to formally consent to the assignment. The landlord is also usually required by statute not to unreasonably withhold or delay giving that consent.

Note: if you feel your landlord is not co-operating, you should explore the options for tenants in our article on  landlords unreasonably withholding consent .

You should ask for the landlord’s consent as soon as possible so as not to delay matters, as the landlord only has to deal with your request within a reasonable time and even then, only once you have provided all the information the landlord needs to reach its decision on whether or not to give its consent. This may include evidence of your assignee’s good standing such as bank and previous landlord references, and copies of audited accounts and bank statements.

If your proposed assignee is not of sufficient standing to satisfy the landlord consent may be granted if the assignee agrees to provide a guarantor for its liabilities or a rent deposit that can then be used if it fails to pay. What the landlord is permitted to insist on will depend on the specific wording of the lease and the specific set of circumstances.

You should also be aware that most landlords will insist that whatever the financial state of the assignee, you, as the outgoing tenant, will be required to guarantee the assignee’s obligations under the lease by what is called an authorised guarantee agreement. You should not make the error of assuming that by assigning your lease you can just walk away from any responsibility. The one thing that the law requires you to do is to find someone who can pay the rent and comply with the lease terms. If you do not do this, then the landlord will be able to recover any arrears from you.

If your lease expressly prohibits assignments without containing a requirement for consent to be given by the Landlord, then the starting point is that you cannot assign it at all. The landlord may still agree to an assignment taking place. This would still be documented by way of a licence to assign but in this case, the landlord would be under no obligation to grant its consent even if it would be reasonable to do so or to act promptly when considering your request to give that consent.

Actual assignments and virtual assignments

Most transfers of the ownership of a lease are carried out by an ‘actual assignment’ where the tenant assigns its interest in the lease to an assignee as explained above.

In a few cases you may seek to use a virtual assignment whereby you remain liable under the terms of the lease, but enter into a contract with a third-party transferring the economic benefits and burdens of the lease, without actually assigning the lease itself. These can be used when the lease contains overly restrictive assignment clauses. You could, for example, declare a trust or enter into a contract in favour of a third-party, effectively transferring the economic benefits and burdens of the lease to them. Beware of clauses in the lease which prevent this sort of arrangement.

If a tenant is a company and the shares in that company are transferred to someone else, then the lease would remain unaffected and the tenant would still be the company. Although not strictly a virtual assignment this change of ownership can be a concern to some landlords and as a result, some leases include express provisions restricting changes in the shareholding of the tenant company.

Registering a commercial lease assignment

If the lease is registered at the Land Registry or has more than 7 years of its term remaining, and you are the assignee, you must register the assignment at the Land Registry. The Land Registry will then process the application and update the title register for the lease so that it is in your name.

The assignee must register the lease as, until it does, the assignment is not fully complete and legally you have not yet become the tenant. This has practical implications as, depending on the wording of the lease, you may not be able to serve a valid break notice until it is registered at the Land Registry. As registration can in some circumstances take a long time, you may find yourself unable to end the lease when you expected. If you forget to register you are unlikely to complete your registration in time to take the steps you need to take.

If you do not apply for registration within 2 months of the date of completion of the lease, the lease becomes void and can only be registered if the Land Registrar agrees to make an order extending the 2 month period.

In addition to registering the lease with the Land Registry most leases include an obligation to notify the landlord that an assignment has taken place and to send them a copy of the assignment document and pay them a fee for noting the transaction. Sometimes the lease sets out the specific notice fee, but often the lease merely sets out a minimum fee. In that case, you should ask the landlord to confirm the notice fee before completing the assignment.

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The effect of an assignment on a lease

Once a lease has been assigned, the assignee steps into the shoes of the tenant and all the rights and duties that the previous tenant had passed over to the new tenant. Occasionally there are rights in the lease which are personal to the original tenant. This often affects the break clause. If the right to end the lease early is personal to the original tenant, you cannot do so if the lease is assigned.

As most leases require the previous tenant to guarantee the performance of the new tenant, the assignment also has the effect of rearranging the liabilities for payment of the rent. Any previous guarantor under an authorised guarantee agreement will have been automatically released by the assignment and rent deposits may become repayable by the landlord.

Assignment v sub-letting

Is it better to assign a lease or sub-let it? The answer very much depends on your specific requirements and circumstances.

Assigning the lease means that you no longer have any interest in the property. It is quite common that a tenant will still remain ‘on the hook’ for the lease obligations after an assignment, as the landlord will likely have insisted that they enter into an authorised guarantee agreement to guarantee the assignee complies with the lease. A landlord will not always insist on an authorised guarantee agreement and, even if one is in place, the obligations on it cease if/when the assignee assigns the lease itself to another party. Most tenants regard an assignment as the best option where they have no current use or interest in the property and do not think they will do so at any point in the future.

You may have to keep the lease in your name if you wish to rely on any personal rights in the lease by granting a sub-lease. This will allow you to retain your interest in the lease, but it also means that you are still liable to pay the rent due under the lease and comply with all of the lease obligations. As the sub-tenant is likely to be in occupation of all or part of the property, you must manage them to ensure that the sub-tenant does not place you in breach of your duties under the lease.

Other reasons for sub-letting include:

• Using the sub-lease as an income stream.
• If you think you may wish to use the property later.
• If you want to dispose of only part of the property and keep the rest for your own use (most landlords are extremely unlikely to allow you to assign part only of your lease).

How much does it cost to assign a commercial lease?

Assigning a commercial lease typically involves various costs that both the assigning tenant and assignee need to consider. Some of the common costs associated with assigning a commercial lease in the UK may include:

• Legal Fees: Engaging a solicitor to assist with the assignment process, review the lease agreement, draft the assignment documentation, and negotiate terms with the landlord can incur legal fees. Usually, the assignor and assignee bear their own legal costs for the transaction. The total fees can vary on a lease by lease basis, but often cost somewhere between £800 to £1,500 plus VAT for a complete service depending on the complexity.
• Landlord's Costs : The landlord usually charges its legal fees for processing the assignment, as well as administrative costs and any costs associated with reviewing the assignee's financial standing to provide its consent to the assignment. Depending on market conditions and bargaining strength, the incoming tenant/assignee usually pays the landlord’s legal fees but parties can choose to split the costs between them.
• Fulfilling lease obligations : Where such conditions are attached to the landlord providing his consent, this could mean anything from ensuring rent payments are up to date, to carrying out any repairs or maintenance deemed necessary, particularly if dilapidations are present.
• Surveyor's Fees : If a surveyor is engaged to assess the property's condition or value, the surveyor's fees may apply.
• Premium : depending on market conditions, if the rent payable under the lease is higher than the average current rate - the incoming tenant or assignee may negotiate that the current tenant pays them a premium to account for the difference.
• EPC : If this certificate has expired, the assignor will likely need to cover the costs of obtaining a new one to market the property.
• Costs for the assignor: If the assignment involves the payment of a premium or consideration, SDLT may be payable by the new incoming tenant based on the value of the premium or consideration. Other costs the assignee may need to factor into account include any security deposits required by the landlord, advance rent or Land Registry fees.

It is essential for both parties involved in the lease assignment to budget for these costs and factor them into their financial planning.

How long does the lease assignment process typically take?

The timeline for assigning a commercial lease can range from weeks to several months, depending on the complexity of the lease, the speed at which landlord consent is obtained, as well as the overall responsiveness of third-party solicitors in agreeing the paperwork. If the landlord is slow to provide consent to assign, or identifies repair works or other obligations to be fulfilled under the lease before agreeing to the assignment, the process will naturally take longer. To avoid potential delays, current tenants should seek to make enquiries with their landlord well in advance of their desired assignment date, and ensure they are up to date with their lease terms.

The process of assigning a lease can be complex and comes with legal implications for all parties involved. Whether you are a landlord, current tenant or incoming tenant, it is crucial to consult legal experts to help you navigate the process effectively and protect your interests in the commercial property transaction. Planning ahead and allowing plenty of time to obtain the landlord’s consent, negotiate the paperwork and ensuring lease terms are complied with can lead to a smoother successful transaction. If you have any questions about assigning a commercial lease, our friendly team of commercial property solicitors at Harper James are here to help.

About our expert

Parmjit Gill

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Out-law / your daily need-to-know.

Out-Law News 1 min. read

Court ruling threatens 'virtual assignments' of property interests

02 Feb 2009, 5:16 pm

The Court said that National Westminster Bank (NatWest) was wrong to have let another company take charge of a property owned by Clarence House Ltd (CHL) using so-called virtual assignments.

An assignment transfers responsibility for a property to someone else. A tenant can assign the property to someone else but usually needs the landlord's permission to do that.

A practice has emerged to transfer control of a property without consulting the landlord using a 'virtual assignment'.

"A virtual assignment is not a full legal process, it is not an assignment, it is just a contract between two parties," said property law expert Allyson Colby of Pinsent Masons, the law firm behind OUT-LAW.COM.

CHL objected to NatWest's virtual assignment of a property to New Liberty Property Holdings Ltd, which had happened without its knowledge or approval.

It said that NatWest had underlet and assigned the property without its consent and had shared or parted with possession or occupation of the property, actions which were against the terms of the lease.

The Court said that it had not underlet or assigned the property, but that by giving control over it to New Liberty it had parted with or shared possession of the property in breach of the lease.

"Most commercial leases prohibit the tenant from assigning, or underletting, or parting with or sharing possession or occupation without the landlord's consent," said Colby. "Such restrictions often prove inconvenient in the context of property outsourcing arrangements, or on the sale of leasehold portfolios where time is tight and consents are required from a multiplicity of landlords. Hence, the use of a virtual assignment, which passes responsibility for premises to the virtual assignee without any legal assignment or change in occupancy of the premises."

But the High Court's ruling could make people structuring property deals shy away from using virtual assignments, said Richard Daffern, another property law expert with Pinsent Masons.

"Property lawyers have always said that there is a potential for a challenge with these," he said. "I suspect people will have to be more cautious."

Colby said that virtual assignment deals are often used in outsourcing deals and in corporate transactions. She said that this case "has important implications for landlords who are affected by virtual assignments and for tenants and third parties who have entered into them".

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Assignment vs Subletting - What is the difference?

Assignment vs subletting – what are the differences.

Assigning a residential lease agreement and subletting are two distinct ways of transferring tenancy rights in a rental property, each involving different legal and practical implications. Here’s a breakdown of their differences:

Assignment of a Residential Lease Agreement:

Definition:

Transfer of Responsibility: Assigning a lease involves transfer of the original tenant’s entire interest in the lease to a new tenant. The original tenant ceases to have any rights or obligations related to the property.

Consent from Landlord: Typically requires the landlord's explicit permission or consent. The landlord is often involved in vetting and approving the new tenant.

Replacement Tenant: The original tenant may find a replacement (assignee) who takes over the lease entirely. The landlord may also market for a new tenant and vet any potential replacement tenants.

Legal Responsibility:

Liability: The assignor (original tenant) is usually released from all liabilities and obligations once the lease is assigned to the new tenant.  This may key off of the new tenant taking possession of the rental unit.

Direct Relationship with Landlord: The new tenant (assignee) becomes directly responsible to the landlord for rent payments, property maintenance, and adherence to lease terms by effectively “stepping into the shoes” of the departing tenant.

Implications:

End of Original Tenancy: For the assignor, once the lease is assigned, their association with the property generally ends. They may not have recourse if the assignee defaults on payments or breaches the lease.

Subletting of a Residential Lease Agreement:

Partial Transfer: Subletting occurs when the original tenant rents out all or part of the property to a subtenant while retaining some rights and responsibilities under the original lease.

Consent from Landlord: Usually requires the landlord's permission, as outlined in the lease agreement. Some leases explicitly prohibit subletting.

Ongoing Relationship with Landlord: The original tenant (sublessor) maintains responsibility to the landlord for lease obligations.

Obligations: The sublessor remains responsible for rent payments and adherence to lease terms, acting as an intermediary between the landlord and subtenant.

Relationship with Subtenant: The sublessee has a legal relationship with the sublessor rather than the landlord. The sublessee must adhere to terms agreed upon in the sublease.

Ongoing Responsibility: The original tenant (sublessor) remains liable to the landlord for the property and its condition. They're responsible for any damages or lease violations caused by the sublessee.

Continued Tenancy: The original tenant maintains an ongoing relationship with the property and the landlord.

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Key Differences: 

• Transfer of Responsibility:  Assigning a lease completely transfers the tenant's interest to a new tenant, while subletting involves the original tenant retaining some rights and responsibilities.
• Direct Relationship : In assignment, the new tenant has a direct relationship with the landlord, whereas in subletting, the original tenant maintains this relationship. 
• Liability and Obligations:  Assigning a lease typically releases the original tenant from obligations, while subletting keeps them responsible for the property.

Both assignment and subletting can offer flexibility to tenants but come with distinct legal and practical implications that tenants and landlords should carefully consider before proceeding. Understanding these differences helps individuals choose the appropriate option based on their circumstances and lease agreement terms.

In most cases, assignment is the best course as it avoids the main pitfall of subletting, namely that the subletting tenant has no direct relationship or responsibility to the landlord/owner of the rental unit.  For that reason, professional property managers normally recommend termination of the original lease and negotiation of a new lease with the replacement tenant.  The outgoing tenant will normally absorb some of the costs associated with securing a replacement and the property manager makes sure the turnover is handled property.  Having experience when these issues arise is important to protect the landlord’s interests.  If you need management of an investment property, call one of our managers today to learn why so many landlords believe TREG is the RIGHT CHOICE for property management.

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Virtually an assignment

"Virtual" assignments of leases are often used in portfolio transactions, corporate deals and other arrangements transferring responsibility without any intention to affect the contractual position between landlords and tenants. To the consternation of those relying on these types of arrangement, this state of affairs was shaken somewhat in January this year, when, in the case of Clarence House Limited v National Westminster Bank Plc [2009] EWHC 77 (Ch)) the High Court decided that by entering into a "virtual assignment" of leasehold premises, the tenant was in breach of standard form alienation covenants in the lease. An appeal, heard in July ([2009] EXCA Civ 1311) has unanimously overturned this decision. The Court of Appeal has held that a Virtual Assignment did not breach the alienation covenants.

The Virtual Assignment

Clarence House Limited are the current landlords of property let to National Westminster Bank Plc. In 2001, NatWest underlet the whole of the premises.

In June 2005, NatWest entered into a Virtual Assignment with New Liberty Property Holdings Limited, in terms of a master agreement between NatWest's parent company and New Liberty. The Virtual Assignment transferred all the economic benefits and burdens of NatWest's leasehold interests. NatWest also granted a power of attorney to New Liberty to act on its behalf.

NatWest did not inform their landlord, nor seek consent to the arrangement. Once the landlord discovered the position, and having concerns about the covenant strength, the landlord issued proceedings against NatWest.

Sharing or parting with possession

Various arguments were made on behalf of the landlord. The alleged breaches were some or all of:

• underletting without landlord's consent;
• assignment without landlord's consent;
• execution of a declaration of trust; and/or
• sharing or parting with possession.

Three of these arguments were rejected. The virtual assignment did not constitute a subletting, nor was it a breach of the covenant in the lease not to assign, which was to be given its standard meaning, namely, not to assign the legal interest. It was also affirmed that there was no assignment since there was no contractual obligation to assign, nor any possibility for New Liberty to enforce an assignment since there was no consent from the landlord.

Neither did the Court agree that there was a declaration of trust created. This was based on the fact that there was no use of language that pointed to the relationship between the parties having been formed as a trust. It was clearly a contractual arrangement.

However, in the matter of sharing or parting with possession, the High Court decided that NatWest had shared or parted with possession, on the basis that there was sharing of control (and therefore some possession). Reference was made to section 205(1)(xix) of the Law of Property Act 1925, which defines possession as including "receipt of rents and profits or the right to receive the same, if any" in support of this decision.

Transfer of economic benefit not tantamount to parting with possession

The High Court described the effect of a Virtual Assignment as "..all the economic benefits and burdens of the relevant lease…are transferred..". The Court of Appeal had to consider whether or not this amounted to parting with or sharing possession. It analysed the contractual arrangements between NatWest and New Liberty and compared the analysis of Virtual Assignments in the case Abbey National PLC v Commissioners of Revenue and Customs [2006] EWCA Civ 886, where it was held that the status of the tenant remained the same, and there was no effect on the landlord/tenant relationship, notwithstanding the Virtual Assignment to a third party.

Other "possession" cases were considered, including Lam Kee Ying [1975] A.C. 257 and Akici v LR Butlin Ltd [2005] EWCA Civ 1296, where possession was linked with allowing a third party into physical occupation to the exclusion of one's own occupation. Applied to this case, any question of parting with or sharing occupation was irrelevant, as NatWest had not been in occupation at any material time.

The Court of Appeal applied the wider definition of possession and held there was an aspect of physical control involved when possession was analysed. The ordinary and normal sense of the word "assignment" included a right to exclude others, and this was the meaning given to the phrase in this case. NatWest had already divested themselves of possession by the underlease. The Virtual Assignment could not alter the position as regards possession, and the fact that NatWest were no longer in possession led to the conclusion that they were therefore not capable of parting with or sharing possession.

The right to receive rents was interpreted as a contractual arrangement. New Liberty were obliged to collect rent from the undertenant and pay rent to the landlord. There was nothing in the agreement that permitted New Liberty to recover any non-payment by the undertenant, from NatWest, nor was there any obligation to pay any monies collected from the undertenant, to NatWest. In addition, New Liberty indemnified NatWest against any liability for any breaches of covenants in the lease. An express assignment of the rent cannot of itself amount to sharing or parting with possession.

The Court of Appeal concluded that the Virtual Assignment could not transfer any legal estate in the premises.

The decision will no doubt bring comfort to tenants who have been using these arrangements. At the same time landlords' interests are preserved with Virtual Assignments not altering the landlord/tenant relationship.

The Court of Appeal stated that there had been no breach of the covenant not to assign without landlord's consent. One of the reasons in support of this was the absence of a reference to equitable assignments in the sub-clauses that specified what events would be a breach of the alienation clauses. It may be the case that some landlords adopt a stricter approach in the wording of alienation provisions in leases to ensure they are aware of dealings with the leases and to avoid having such arrangements forced upon them. This may be an important measure to prevent the landlord inheriting financial covenant issues since the tenant he has contracted with may have assigned the right to a source of income. Any decision to further restrict alienation rights however must be balanced against the view taken of overly restrictive lease provisions when it comes to rent review.

The Court of Appeal's decision in the case of Clarence House Limited v National Westminster Bank Plc can be viewed at the British and Irish Legal Information Institute's website.  

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is included in the 2024 renters guide.   340 IMAGES Virtual Office Lease Agreement Template in Word, Google Docs, Pages Virtual Office Lease Agreement Template in Word, Google Docs, Pages 50+ SAMPLE Assignment of Lease in PDF Assignment Lease Agreement Template Virtual Office Lease Agreement Template Virtual Office Lease Agreement Template VIDEO Leases: Lessor’s Accounting for Certain Leases With Variable Payments Virtual Assignment Productions presents VIRTUAL TOURS What is Lease Option Assignment? Part 2 #leaseoption #investing #realestate #texas #viral #mentor What is Lease Option Assignment? Part 1 #leaseoption #investing #realestate #texas #viral #mentor What is Lease Option Assignment? Part 3. #LeaseOptions #investing #realestateinvestment #viral Handling Requests for Commission Discounts in Business Sale Transaction COMMENTS Landlord and tenants should be aware of Virtual Assignments The advisable course of action for a landlord is to require notification on any virtual assignment and to monitor the situation carefully, reacting to the first sign of the tenant being in financial trouble. Conclusion. A virtual assignment is a contractual transfer of the benefits and burdens under a lease, without legal assignment of the lease. Landlord and tenant A "virtual assignment" is an arrangement under which all the economic benefits and burdens of a lease are transferred to a third party, but without any actual assignment of the leasehold interest. Virtually an assignment "Virtual" assignments of leases are often used in portfolio transactions, corporate deals and other arrangements transferring responsibility without any intention to affect the contractual position between landlords and tenants. To the consternation of those relying on these types of arrangement, ... What is a virtual assignment? '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 ... "Virtual assignments": strange new beasts in the forest The tenant entered into a virtual assignment of the lease, whereby it transferred to a third party all the economic benefits and burdens of the lease and underlease, including management responsibilities, but without assigning the leasehold interest or changing the actual occupancy of the premises. The assignee was to pay the rent and perform ... virtual assignments and their tax treatment A "virtual assignment" is a contractual arrangement under which all the economic benefits and burdens of a lease, including management responsibilities, are transferred to a third party without ... Virtual Assignment of a Commercial Lease The actual assignment of a commercial lease will take place through either a transfer using a Land Registry form TR1 for registered leases or a deed of assignment for unregistered leases. Virtual Assignment of a Commercial Lease in the UK . You can also transfer the lease via a virtual assignment. 'Strange New Beasts In The Forest' Virtual assignments are a relatively new concept. Until recently their impact on the landlord and tenant relationship has been uncertain but the Court of Appeal in Clarence House Limited v National Westminster Bank Plc [2009] confirmed that virtual assignments do NOT amount to a breach of standard alienation covenants prohibiting assignment without consent, sharing or parting with possession ... Assigning a commercial property lease to another business Actual assignments and virtual assignments. ... How long does the lease assignment process typically take? The timeline for assigning a commercial lease can range from weeks to several months, depending on the complexity of the lease, the speed at which landlord consent is obtained, as well as the overall responsiveness of third-party ... Ask the team: Should landlords be concerned about virtual assignments An article on whether landlords should be concerned about a virtual assignment by a tenant. Get full access to this document with a free trial Try free and see for yourself how Practical Law resources can improve productivity, efficiency and response times. What is virtual assignment? A virtual assignment can be an attractive proposition for tenants, particularly corporate tenants, in that they can quickly and easily remove the liabilities of a lease from the company balance ... Court ruling threatens 'virtual assignments' of property interests "A virtual assignment is not a full legal process, it is not an assignment, it is just a contract between two parties," said property law expert Allyson Colby of Pinsent Masons, the law firm behind OUT-LAW.COM. ... "Most commercial leases prohibit the tenant from assigning, or underletting, or parting with or sharing possession or occupation ... PDF Virtual assignments: the fi nal word? virtual assignment did not result in a breach of any of these because: Th ere had been no "declaration of trust" with regard to the property or the lease. Th e virtual assignment was a purely contractual arrangement pursuant to which no fi duciary duties were owed to the virtual assignee. It could not be regarded as constituting a Virtual assignments A virtual assignment occurs where a tenant agrees to pass the economic benefit and burden of a lease and the performance of other responsibilities under the lease (e.g. management responsibilities ... PDF Virtual Assignments and Leasehold Alienation Covenants plc. [2009] EWCA Civ 1311, [2009] 1 W.L.R. 1651 that the "virtual assignment" of a lease did not breach standard-form leasehold cove-nants against alienation. Despite being described by Ward L.J. in Clarence House as "strange new beasts in the forest", virtual assignments have become increasingly common in the commercial leasehold sector. Virtual assignments and leasehold alienation covenants COMMERCIAL leases invariably contain express limitations on the otherwise unfettered right of tenants to assign or sublet their leasehold interest to third parties. Landlords use these clauses to i... Assignment vs Subletting Key Differences: Transfer of Responsibility: Assigning a lease completely transfers the tenant's interest to a new tenant, while subletting involves the original tenant retaining some rights and responsibilities. Direct Relationship: In assignment, the new tenant has a direct relationship with the landlord, whereas in subletting, the original tenant maintains this relationship. Virtually an assignment The virtual assignment did not constitute a subletting, nor was it a breach of the covenant in the lease not to assign, which was to be given its standard meaning, namely, not to assign the legal ... Off-Campus Housing Options Office of the Dean of Students TLC 232. Physical Address: 875 Line Street Moscow, ID 83844. Mailing Address: 875 Perimeter Drive Moscow, Idaho 83844-2431 Alienation covenants: virtual assignments The Court of Appeal has held that, by entering into a virtual assignment, a tenant had not breached the alienation provisions in its lease. For full coverage of this case, see PLC Property, Legal update, Alienation covenant and virtual assignment (Court of Appeal) (full update). Home Office hours. Monday - Friday 8:00 am - Noon & 1:00 pm - 4:30pm Closed Saturday Closed Sunday. Holiday Closures. Labor Day, September 2, 2024 Thanksgiving, November 24-25, 2024 Palouse Properties Our Spring 2024 Preview Price List is included in the 2024 renters guide. Russian dairy farmers gave cows VR goggles with hopes they would be It was a cow's (virtual) paradise. The cows were transplanted to a wild, expansive field beneath the summer sun. It was a cow's (virtual) paradise. ... 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