Advantages and disadvantages of using a lease, licence and tenancy at will.

This article deals with the issues that owners of commercial premises may face when trying to decide how to document the occupation of a property on a short- term basis. It concentrates on the advantages and disadvantages of using a lease, licence and tenancy at will.

What is a lease?

A lease is the grant of a right to the exclusive possession of land for a determinable period of time. The period of time being of a duration that is certain.

A lease is both a contractual relationship and an estate in land, and therefore capable of existing independently of contract (so the lease will continue after assignment of the term or of the reversion). There are many types of leases and ways of describing them.

One of the key elements of a lease is exclusive possession. A person has exclusive possession if it can exercise the rights of the landowner and exclude both the landlord and third parties from the land.

Possession is not the same as occupation: a tenant may have possession by virtue of being able to receive the rents reflecting the right of ownership but the person in occupation could be the undertenant to whom the tenant has granted an underlease.

The label of a document as a lease is not determinative. A lease may still come into existence, if exclusive possession is granted.

What is a licence?

A licence is simply permission for a licensee to do something on a licensor’s property. The permission given to the licensee prevents the permitted act from being a trespass.

A licence is, by definition, not a lease: it is a personal right or permission that offers no security.

A licence entitling the licensee to use the land for the purpose authorised by the licence does not create an estate in land. A licensee’s occupation is precarious. If the landowner sells the land, the licence will end, although the licensee may have a right of action against the original licensor for breach of contract.

The distinguishing feature of a lease, as opposed to a licence, is that the tenant has exclusive possession of the property.

There have been numerous cases over the years on the lease/licence distinction but the leading case is still the House of Lords’ decision in Street v Mountford [1985] AC 809:

”If the agreement satisfied all the requirements of a tenancy, then the agreement produced a tenancy, and the parties cannot alter the effect of the agreement by insisting that they only created a licence.”

The decision in Street v Mountford was reinforced in more recent cases.

Will labelling an agreement a licence make it a licence?

The fact that an agreement purports to create a licence does not mean that it will be construed as a licence, and not a tenancy. In Street v Mountford, the House of Lords held that the court should look at the substance as well as the form of the agreement in deciding whether an agreement is a licence or a tenancy.

Parties cannot turn what is in reality a tenancy, into a licence, by calling it a licence. Even though a document is labelled a licence, case law illustrates that the courts are prepared to look beyond the label given to a document.

The terms of the agreement are not irrelevant though. The court will analyse the substance of the rights and obligations contained in the agreement.

Where the document has any of the following characteristics, this may indicate that a “licence” is not a licence:

It grants exclusive possession. Generally, a tenancy is created where there is exclusive possession.

It is for a fixed term.

It reserves a rent.

The fact that the “licence” is for a fixed period of time does not necessarily prevent it from being a licence, as a licence can be for a fixed term. Similarly, if the licensee is required to make a payment under the licence (which the parties call a “licence fee”), this will not necessarily prevent the arrangement from being regarded as a licence.

Examples of situations where a licence to occupy can be used

Some examples of where a licence to occupy may be encountered include:

As a “concession” arrangement in a department store.

Where serviced office space is made available for a short period of time.

Where commercial property guardians are engaged.

Guardian schemes are meant to act as a deterrent against squatters and vandalism. Companies (guardian providers) arrange for a commercial property to be used for residential purposes, placing occupiers (guardians) into the property. Properties are often offered at a below market rent, making the arrangement financially attractive to occupiers.

The decision in the case of Camelot Garden Management Ltd v Khoo [2018] EWHC 2296 (QB) emphasised that the commercial nature of the arrangements depended upon the agreement being a licence. Weight was also given to the fact that there were multiple guardians at the property and the agreement required the guardians to agree amongst themselves how the space was to be used. The High Court held that Mr Khoo did not have exclusive possession and was a licensee not a tenant. Whilst the decision is of comfort to commercial property owners using property guardians, the case did turn on the facts. It can be contrasted with the non-binding decision in Camelot Property Management Ltd and another v Roynon (24 February 2017) Bristol County Court, unreported) in which a property guardian was found to be a tenant.

Between a seller and buyer during the period between exchange and completion of a sale contract.

Between a prospective landlord and tenant between exchange of an agreement of lease and the grant of a lease.

What is a tenancy at will?

A tenancy at will exists where there is a tenancy on terms that either party may determine the tenancy at any time. It may be express or implied and may be hard to distinguish from a licence to occupy.

A tenancy at will cannot be assigned. It is generally regarded as a “bare” tenure and not an estate in land. It is a personal relationship between the original landlord and tenant.

Tenancies at will are often used where the parties are in negotiation for a lease to be granted for a fixed term and want to document a short-term occupational arrangement pending completion of the lease.

Payment of rent

The periodic payment of rent will not, of itself, make the tenancy a periodic tenancy. However, there is case law to the effect that rent paid periodically will not prevent the arrangement from being a tenancy at will.

Termination

A tenancy at will may be terminated by either party: the intention to terminate must be notified by the terminating party to the other.

A tenancy at will is terminable by the landlord demanding possession or the tenant giving up possession, for example by the landlord demanding the keys. The landlord may state that the tenancy is at an end and that possession is to be given back immediately. Where a landlord has determined a tenancy at will, the tenant at will has a reasonable time to enter the property after the termination to remove its goods.

If the tenant gives notice, then they must give up possession of the property.

Where a new tenancy is granted, for example, a longer, fixed term lease, the tenancy at will automatically ends.

Security of tenure

A tenancy at will does not give the tenant security of tenure under the 1954 Landlord and Tenant Act.

What are the differences between a lease, licence and tenancy at will?

A lease or a tenancy confers on the grantee an interest in land; a licence does not.

A licence is a personal privilege: it makes lawful that which would otherwise be unlawful. A licence entitling the licensee to use the land for the purpose authorised by the licence does not create a tenancy.

The tenant who has exclusive possession of land is able to exercise the rights of an owner of land. The land subject to the tenancy becomes the tenant’s land, albeit temporarily. A licensee lacking exclusive possession cannot call the land its own.

A licensee with a right to occupy land does, however, have sufficient interest to maintain an action for trespass against a third party where it is necessary to give effect to its rights under the licence.

Why is the distinction between a lease, a licence and tenancy at will important?

A licence and a tenancy at will, if properly drawn up, do not confer security of tenure under Part II of the LTA 1954. Under Part II of the LTA 1954, a tenant occupying premises for the purposes of its business generally has a statutory right to renew its tenancy at the end of the term. The landlord can only oppose renewal on certain limited grounds. The right to a new lease applies to all tenancies where the property is occupied (at the end of the term) by the tenant for the purpose of the tenant’s business subject to certain exceptions.

Consequently, this makes licences and tenancies at will attractive options where an occupier is seeking a short term occupational arrangement. However, landlords and tenants should never enter into a lease, licence of tenancy at will without consulting a commercial property expert as there are many pitfalls that could come back to haunt them in the future.

If you require legal assistance with this or a similar Commercial Property matter take advantage of our complimentary initial telephone consultation with one of our legal experts. Call 0800 999 4437 or email enquiries@parfittcresswell.com today to arrange your no-obligations consultation.