When it comes to documenting the occupation of commercial premises, a decision needs to be made very early on whether the tenant will occupy as a tenant under a lease, as a licensee under a licence, or perhaps under a tenancy at will.
There are stark differences between each of these arrangements, and it is important that both parties properly understand what arrangement is being proposed and what its legal implications are before any paperwork is signed.
What is a lease?
A lease is usually a written document that gives the tenant the exclusive right to occupy a parcel of land for a known period of time. A lease is a contract between the landlord and the tenant. The terms' lease' and 'tenancy' are interchangeable but mean the same thing.
What does exclusive possession mean?
One of the key elements of a lease, as opposed to a licence, is that the tenant has exclusive possession of a particular land parcel. The area that the tenant is allowed to occupy exclusively may also be called the 'lease demise'.
The occupier has exclusive possession if they can exercise the rights of the landowner over the land parcel and exclude both the landlord and third parties from the land. There is a very stark legal difference between possession and occupation in legal terms.
A tenant might have possession by virtue of being able to receive rent from the land, but the person in occupation might be an undertenant to whom the tenant has granted an underlease.
Does the lease have to refer to rent in order to be a valid lease?
It's usual for rent to be a key feature of any written lease, not least because the owner of the land expects to extract an income in return for allowing the occupier to be there. There is a mixed view from the judiciary on whether or not a lease has to refer to a rent, but reference to rent is a key feature of a lease as opposed to a licence to occupy.
A lease cannot be granted by a party who does not have the legal right to grant such a lease.
What is a licence?
A licence is simply permission for someone to do something or occupy the licensor's property. The permission allows the occupier to be on the land and means that they are not trespassing. A licence is, by definition, not a lease; it's a personal right or permission that offers no security of tenure or ongoing right to be on the land.
A licence puts an occupier in a precarious position, particularly if they are running a business from the site, because it is usual for the licence to allow the landowner to terminate the arrangement very easily and with very little notice. A licence is also personal to the original parties, which means if the landowner sells their land, even to a group company, the licence will end.
Will labelling an agreement "licence" make it a licence?
This is an interesting question that has been the subject of many, many cases in English law. We often see agreements called licences, but when you look at their terms, they are leases. If the document grants the occupier exclusive possession for a fixed period and reserves a rent, then it is more likely to be a lease as opposed to a licence.
When might you use a licence?
It's common to use licences in the following circumstances:
- Concession agreements, such as in a department store or shop.
- Serviced office space for a short period of time.
- For commercial property guardian schemes.
- Occupation pending sale.
- Completion of a sale where the seller allows the buyer to occupy during the period between exchange and completion.
- Occupation pending completion of a lease where the tenant is allowed to occupy between exchange of an agreement for lease and the grant of a lease.
Can I assign a licence to a third party to allow them into occupation?
The answer is probably no. A licence is a personal occupation right, so it cannot be assigned to a third party.
What is a tenancy at will?
A tenancy at will exists where there is a tenancy on terms that either party can end at any time. The terms can be expressed or implied from what has happened on the ground, and it can sometimes be hard to distinguish this type of arrangement from a licence.
A tenancy at will cannot be assigned to a third party. It is not an estate in land, it is simply a personal relationship between the original landlord and tenant.
Tenancies at will are often used where the parties are in negotiations for a new lease and want to document a short-term occupant or renter before the new lease has been completed. You should always take advice when you are preparing a tenancy at will or about to sign one because if it's not properly drawn up, then what you might think is a tenancy at will could, in fact, turn out to be a periodic tenancy and in those circumstances, different notice would have to be given in order to bring the arrangement to an end.
If you occupy as a tenant at will, then you have no protection from the Landlord and Tenant Act 1954. If the parties are considering entering into a tenancy at will to avoid a business tenant acquiring security of tenure under the 1954 Act, then an alternative to a tenancy at will is to grant a contracted-out lease for 6 months or less.
Differences between a lease, licence and tenancy at will
A lease or a tenancy at will gives the occupier an interest in the land, a licence does not.
A licence is a personal privilege that allows the occupier to be there, as without the licence, they would be trespassers. A licence allows the occupier to use the land for the purpose authorised by the licence, which does not create an interest in the land. A tenant with exclusive possession of land can exercise the rights as if they were the owner of the land for the tenancy period. A licensee without exclusive possession cannot call the land their own.
Important differences between a lease, licence and tenancy at will
Both parties must understand what arrangement is being entered into because if a licence or tenancy at will is not drawn up properly, then a landlord could find that they have an occupier with the protection of the Landlord and Tenant Act 1954. This means that the occupier would be able to renew their tenancy at the end of the term.
Which leases are not protected by the Landlord and Tenant Act 1954?
Some leases can be granted that are not protected by the 1954 Act. It is possible to exclude the lease from the 1954 Act renewal and security of tenure provisions before the lease is entered into and a process is followed to ensure that that is done properly.
In other circumstances, you can grant a lease that is exempt from the renewal provisions of the 1954 Act if the lease satisfies the exemptions listed in Section 43 (3) of the LTA 1954. Examples of exempt tenancies under Section 43 are:
- Leases of agricultural holdings
- Farm business tenancies
- Mining leases
- Leases where the tenant occupies because of their employment
- Certain tenancies for 6 months or less
- A home business tenancy
What clauses in the agreement might indicate it is a licence?
Examples include:
- A clause that the occupier should not interfere with the owner's right to possession and control of the premises
- A clause entitling the owner to require the occupier to move to other areas selected by the owner
- Provisions preventing use of the property for a period in each day or granting the right to use the property only for a particular part of each day
What clauses might indicate that it is a lease?
Examples include:
- Clauses where the landowner reserves the right to enter and view the condition of the property or repair the property
- Where the tenant is granted exclusive possession for a fixed period or periodic term at a rent.
As you can see, it is not always crystal clear what kind of arrangement you are entering into to avoid a landlord-tenant dispute later on. We'd urge you to seek legal advice if you are unsure.
