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Lease or licence? What’s in a name?

March 12, 2020

When it comes to occupying business space, landlords and tenants need to know the legal basis of that occupation to avoid operational difficulties, disputes and unintended consequences further down the line. A common view is that if the premises are relatively small, or the period of occupation short, or the “rent” low, then less attention needs to be paid to the legal issues and the arrangements between the parties can be relatively casual.  However, this is a mistaken belief, as the most apparently insignificant of occupations can cause significant issues for both landlords and tenants.

There are various options when it comes to letting commercial space – lease, licence or a friendly handshake (or elbow bump these days) with nothing in writing. Leaving aside the undocumented option, which is rarely advisable, we shall look at the lease and licence options in turn.

Lease

A lease gives the tenant an interest in the property and the right to occupy it for the term, subject to paying rent and commonly, a service charge.  Key points to note are:

  • A lease gives the parties certainty as to the terms on which they occupy. It sets out who is responsible for what, such as repairs and maintenance.  It enables the parties to plan ahead and budget for property costs. 
  • It restricts certain tenant activities without the landlord’s consent, such as assigning the lease, subletting and carrying out alterations.  It therefore gives the landlord control over its property.
  • It imposes obligations on the landlord to ensure the tenant can enjoy the premises without interruption and often requires the landlord to provide certain services for the benefit of the tenant. 
  • The Landlord and Tenant Act 1954 gives tenants of leases security of tenure, unless it is excluded by agreement in the lease.  It is therefore essential that, before the lease is entered into, the parties address this issue and agree on it, otherwise, at the end of the term, the tenant is automatically entitled to a new lease of the premises (subject to certain provisions in the Act).  
  • The lease can contain break clauses, to bring the term to an end early, giving the parties flexibility, whilst retaining certainty.

Licence

Licences create a personal permission to occupy and are best used for very short-term occupancy or for sharing arrangements (e.g. coworking space).  

As we ask above: “What’s in a name?”  The reason for this is that, even if the parties call a document a licence and intend it to be such, there is a real risk that what has been created is, in fact, a lease, if the following criteria are met:

  • Exclusive possession 
  • Licence fee/rent
  • Fixed term

This is a problem, particularly for Landlords, as it a) creates an interest in the property, as opposed to a personal permission which can be withdrawn and b) attracts security of tenure under the LTA 1954. 

In London College of Business v Tareem (2018), the College was allowed to occupy premises on the basis of a “licence”.  A dispute arose and the licensor changed the locks. The court required the licensor to allow the College back into occupation, the College claimed for wrongful exclusion and damages, and it was held that a lease, not a licence, had been created, and the College enjoyed security of tenure under the LTA 1954. Clearly not a good outcome for the landlord. 

In conclusion, whilst property owners often believe a licence will keep things simple, as well as avoiding occupiers gaining security of tenure, the reality is that, in most cases, the better option is to put a short form lease in place, which is validly contracted out of the LTA 1954, and generally does not involve much more legal work and cost.

Top tips

 

  • Ask yourself the following questions:
  1. Will the occupier have exclusive possession of the premises?
  2. Will a “rent” be paid?
  3. Will the occupation be for a certain amount of time?
  • If the answer is “Yes” to some or all of these questions, then what is being granted may be a lease and you need to take legal advice.
  • Remember it does not matter what you call the document, as the court can look beyond this to see what is happening in practice and decide that, whilst called a Licence, what has been granted is, in fact, a Lease.
  • If a lease is granted (whether intentionally or unintentionally) always consider the security of tenure implications and take legal advice.

How can LawBite help?

Commercial leasing requires careful consideration because it’s often long and complex. There are compelling obligations and responsibilities for tenants, landlords and guarantors, and as such, all parties should ensure that they are safeguarded.

Our expert property lawyers work with tenants and landlords to advise and deal with property disputes, and in general, advise on all types of commercial property law.

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Philippa CobbThe author of this blog post is commercial property lawyer Philippa Cobb.

Philippa worked for many years in London in private practice, advising a variety of SMEs in relation to their commercial property interests, as well as acting for property developers and investors. Following a relocation to Exeter, she then enjoyed an in-house legal role for 10 years with the University of Exeter, advising on a broad range of real estate matters.

 

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