What is the meaning of “parting with possession”?

The majority of covenants in leases relating to a tenant’s ability to assign or underlet will also restrict parting with possession or sharing occupation of the premises demised by the lease. The meaning and practical impact of these types of restrictions are not matters which the real estate sector considers on a regular basis.

However, it is becoming increasingly common for companies to part with possession or share occupation as part of their normal day to day activities. Examples include:-

• As part of outsourcing arrangements, the supplier is likely to “use” part of the customer’s premises as part of the provision of services.
• Similarly, it is becoming increasingly common for “customers” to have some form of security arrangement in relation to their suppliers’ premises (particularly in the consumer products sector). Probably the best example is a company which provides refrigerated food storage facilities. If the supply contract is terminated the customer may want the ability to take over the supplier’s premises.
• In the hotel sector where management arrangements and parting with possession or sharing of occupation are common.
• In insolvency situations where a buyer of an insolvent business may be allowed to temporarily occupy, say, retail premises under a licence pending receipt of landlord’s consent to assign or sub-let to that new operator.

The question of what amounts to parting with possession or sharing of occupation is therefore one which the sector does need to focus on. Very recently the High Court has given some guidance on this – and this was in the context of a tenant under long leases who had been providing services to Ford and Ford now wants to take back the operation and run it itself.

The case concerned a large area of land in Liverpool used for the storage of Ford motor vehicles. Ford wished to take control of the business operation and in 2007 made an agreement with the tenant giving Ford permission to occupy the site “under licence agreements to be agreed”. If no agreement was reached, Ford could call for the grant of an underlease subject to obtaining all necessary licences.

When the tenant did approach the landlord of the premises for consent to an underletting in 2011, this was refused. The landlord claimed that the tenant was in breach of the lease because it had parted with possession of the premises to Ford.

The Court found the tenant had not parted with possession of the premises. Case law has consistently given a strict, narrow meaning to covenants against parting with possession. It has been held that “nothing short of a complete exclusion of the grantor or licensor from the legal possession for all purposes amounts to a parting with possession”. The judge found that “The acid test for possession, as contrasted with mere occupation, lies in the right of the person in occupation to exclude others, including the tenant, from the premises.” In this case, from the signing of the heads of terms in 2007 until the request for licence to underlet in November 2011, Ford exercised an increased degree of control over the site. The Court found that the control was to do with control over the business conducted at the site and not Ford’s ability to control access by the tenant. The tenant had not wholly ousted itself from possession and was not, therefore, in breach of the lease.

The case reminds us that possession and occupation are separate legal concepts and that the real test is whether the tenant had completely transferred its right to exclude others from the premises.

Law: Ansa Logistics Ltd -v- Towerbeg Ltd and Ford Motor Co Ltd [2012] EWHC 3651 (Ch)