By Ghazala Mahmood
Occupiers of commercial properties need to know the legal basis of their occupation. Often the basis of occupation is made pursuant to a Lease or a Licence. There are many crucial differences between a Lease and a Licence and if you are not sure of the status of your occupation, you will not be sure of your rights or obligations.
What is a lease?
A commercial lease is a legally binding agreement between a tenant and a landlord. The lease sets out rights to use the property for a commercial use for a specified time. In return the tenant pays rent to the landlord.
A lease provides the tenant with a right to “exclusive possession” of the property. This means that the tenant can exclude all others from the property save for any rights of entry in favour of the landlord and/or others specifically set out in the lease.
A lease provides the landlord with the certainty of rent for a fixed period and to the tenant it provides security of occupation for a set period of time.
“Where property owners are looking to grant a licence, they should be very careful as they do not want to inadvertently grant a lease, which could offer the occupier protection under the Landlord and Tenant Act 1954.”
Tenants of business premises may also benefit from statutory protection under the Landlord and Tenant Act 1954. This act gives certain rights to business tenants in occupation of a commercial premises. Namely, the right for the business tenant to remain in occupation of the premises after the end of the lease. The Lease continues automatically until it is bought to an end in the ways specified under the Landlord and Tenant Act of 1954. It is possible for the parties to a commercial lease to exclude these protective provisions by agreement before entering into the lease.
You can buy and sell a lease, subject to any provisions set out in your lease.
What is a licence?
A licence is a permission for someone to do something on another’s property. A licence offers little security to the licensee. It is a personal right that is granted to occupy a property often for a short period of time. It does not give an individual any property rights. You cannot buy or sell a licence. There is no right of “exclusive possession”, and the licensee cannot exclude all others from the property. There is also no security of tenure and, it cannot be renewed automatically. If the Licensor sells their interest in the property, the licensee’s right to occupy the property ceases immediately.
While it may appear that there are too many disadvantages in entering into a licence, there are occasions when a licenceis preferred to a lease. For instance, where one requires occupation of a premises very quickly and on a short–term basis i.e. a retailer wanting to set up a seasonal shop just before say Easter, for instance.
Caution to be exercised
The difference between a lease and a licence can get blurry. This has not been helped by the fact that the courts have held that some agreements, although titled as being a licence are in fact leases. The court considers the document as a whole, together with the facts of the case.
Where property owners are looking to grant a licence, they should be very careful as they do not want to inadvertently grant a lease, which could offer the occupier protection under the Landlord and Tenant Act 1954.
The case of London College of Business Ltd v Tareem Ltd and another [2018] EWHC 437 (ch) exemplifies that the name of the document whether ‘lease’ or ‘licence’ is not conclusive evidence of the type of document it actually is. In this case the Claimant (the College) occupied parts of an office building owned by the First Defendant (the Owner) since 2006. The most recent of these agreements was completed on 22 June 2012, and was labelled “Licence Agreement” with the parties to the agreement labelled as “Licensor” and “Licensee”. There were, interestingly, various other terms in the agreement which purported to support that the agreement was in fact a Licence.
The Agreement had a clause entitling the Owner to serve notice to terminate if the College fell into arrears. On Sunday 21 September 2014, the Owner attempted to end the agreement by re-entering the premises and changing the locks. The Claimant obtained an injunction allowing them to re-open after being locked out for three days and claimed it had suffered significant loss of profit and damage to its goodwill.
There were a number of issues raised at Court including the Owners right to re-enter, the sum of arrears and any damages due to the College. The Court looked at the case of Street v Mountford [1985] UKHL 4 which established that the characteristics of a Lease are:
- grant of exclusive possession;
- for a term;
- at a rent.
The court described exclusive possession as follows “The tenant possessing exclusive possession is able to exercise the rights of an owner of land, which is in the real sense his land albeit temporarily and subject to certain restrictions.”
The decision in the case of Addiscombe Garden Estates v Crabbe [1985] 1 Q.B 513 also established that the agreement in its entirety must be examined and that any agreement which gives rise to obligations of landlord and tenant will be treated as such.
The court’s decision was that the “Licence Agreement” was in fact a Lease. Despite the language in the agreement, there were several factors that supported the finding that exclusive possession had been granted:
- The College had fitted out the premises at its own expense and the Owner was aware of this;
- It was unrealistic to imagine that the Owner would truly have the right to interrupt the College’s business by exercising the right of entry set out in the agreement;
- There was a clear intention of the Owner to allow the College to run its business at the premises provided that it was paid the specified sum under the agreement;
- Neither the Owner nor its managing agents had ever sought to exercise the right of entry which was initially referred to back in 2006;
- Any meetings on site had always been arranged in advance and not just as a matter of courtesy;
- Finally, the court accepted the College had been in a weak financial position at the outset and had not been able to negotiate the terms of agreement.
Therefore, just the mere means of labelling an agreement a “Licence” will not guarantee that the agreement will be construed as a Licence. This may seem an a easy way to avoid security of tenure provisions in the Landlord and Tenant Act 1954, however if done incorrectly landlords may be left with giving their occupier more rights than what was originally intended. It will be best to have legal certainty from the outset and our Commercial Property Team is here to assist you with all your commercial property needs.
Ghazala Mahmood our commercial property Associate at Tiger Law has over 15 years experience in advising commercial property clients. Ghazala offers remote meetings via telephone or video conferencing. Contact her to help you with your commercial property needs on 01622 804 077 or on ghazala@tiger-law.com
