Commercial Arrangement Breaches Lease Terms

In a recent case, the courts had to consider the legality of a commercial arrangement undertaken by a bank with a company, the effect of which was to allow the company to ‘stand in its shoes’ with regard to a commercial lease. At issue was whether this constituted a breach of the terms of the lease.

NatWest had rented a property from a landlord on a 25-year lease. Under the lease terms, NatWest was prohibited, as is usual in such leases, from:

• executing any declaration of trust over the premises (i.e. giving anyone else rights over them during the period of the lease);
• allowing anyone else to occupy or share in the possession of the premises;
• subletting the premises without the landlord’s consent; and
• assigning the lease to a new tenant without the landlord’s consent.

NatWest sought and obtained the landlord’s permission to sublet part of the premises to another company.

When NatWest was merging with the Royal Bank of Scotland, the lease was ‘virtually assigned’ to a new company called New Liberty Property Holdings Ltd. (NLPH). The lease was not formally assigned: the virtual assignment meant that NLPH took the income from the subtenant, paid the rent to the landlord and performed the covenants under the lease in the place of NatWest. The arrangement claimed to create no legal property rights in favour of NLPH.

The landlord sought a declaration that this amounted to a breach of the lease terms.

In court, it was ruled that:

• the relationship created between NatWest and NLPH was contractual and did not involve the creation of a trust;
• there was no creation of a sub lease; and
• there was no assignment of the lease.

However, the court ruled that the arrangement did create a sharing of the possession of the premises contrary to the terms of the lease.