Lease or licence? The important distinction
Megan Richardson explains the important legal distinction between a lease and a licence.
What is a lease?
A lease is the right to exclusive possession of a property for a specific period of time.
Exclusive possession allows a person to exercise the rights of a landowner and to exclude both the landlord and third parties from the property (other than for rights reserved to the landlord in the lease to enter the property in particular circumstances, for instance, to carry out repairs).
A lease is often used when a person or organisation wants to take occupation of a property for business purposes, whether that be a restaurant, hairdressers or warehouse.
A rent is generally payable and the landlord would normally expect the tenant to be responsible for repairing and insuring the property.
What is a licence?
A licence is simply a personal permission for a person using the property (licensee) to do something on a landowner’s (licensor’s) property so as to prevent such act from being a trespass. A licence offers very little security to the licensee and generally either party can terminate the licence on short notice.
A licence is commonly used for short term, informal arrangements. For example, a ‘concession’ in a department store, or between a seller and buyer for the period between exchange of contracts and completion.
The importance of the distinction
If you simply call an agreement a ‘licence’ but what in fact has been granted is a lease, then the courts are willing to look beyond what the document is simply called, if in fact the substance of the agreement is a lease. This principle was established in the leading case on this matter of Street v Mountford.
The following points would be considered in assessing whether a ‘licence’ may in fact be a lease.
- The agreement grants exclusive possession to the occupier;
- The agreement is for a fixed term;
- The agreement reserves a rent.
Nevertheless, a licence can be granted for a fixed term and can reserve a rent, however, all the facts in any particular case would need to be fully considered.
Under the Landlord and Tenant Act 1954, a tenant occupying a property, for the purposes of its business, generally has a statutory right to renew the tenancy at the end of the term (security of tenure) unless the agreement specifically excludes this statutory right. Therefore, it is imperative that an occupier’s occupation of a property is correctly drafted to ensure that it gives legal effect to what was intended, otherwise, a landowner may be left in a position where he finds himself in difficulty in securing possession of his property back.
If a licence is entered into on the basis that a short term arrangement is all that is required, it is important to keep this under review so as to avoid a short term arrangement continuing beyond the period of time initially envisaged and the possibility of an occupier gaining security of tenure protection.
Lease or licence? The clauses
There are particular clauses that can be included in the form of agreement that would indicate that it is more likely to be a licence than a lease or vice versa.
For example, a clause stipulating that an occupier must not impede the landowner’s exercise of its rights may point towards the occupier not having exclusive possession and having a licence. In contrast, the inclusion of a forfeiture clause or clauses dealing with the tenant’s right to assign or underlet the agreement may point towards a lease.
If you are considering granting a 3rd party occupation of your property (whether than be a short term or longer term arrangement) or you are looking to take occupation of a property, then our Commercial Property team would be happy to assist you to avoid such pitfalls that can commonly arise in this lease/licence situation. If you require any further details, please contact Megan Richardson at firstname.lastname@example.org.
About the author
Megan is an Associate Solicitor in the Agribusiness & Commercial Property teams.