Partner Katja Wigham, in our Commercial Property team, looks at when to use a lease, license or tenancy at will when it comes to property.
The document, or contents of the document, used to formalise an agreement for occupation of commercial premises is very important and should reflect the reality of the arrangement.
The label of the document/agreement is not definitive; instead it will be determined on its facts. If an agreement is badged as a ‘licence’ but has all the aspects of a lease e.g. exclusive possession, determinable term of years and other supporting evidence such as a rent, then it will be a lease. Similarly, if an agreement purports to be a ‘tenancy at will’ but the arrangement is more like a lease in nature, it will be construed as such.
This can have undesirable consequences particularly for the Landlord so it is important to ascertain which form the agreement should take from the outset and then monitor whether the position changes during the lifetime or continuation of the agreement.
Lease
A lease is the grant of a right to the exclusive possession of land for a determinable period of time.
There may be reasons why an occupier would prefer not to be granted a lease, for example the potential liability to pay SDLT, and reasons why an owner would prefer not to grant a lease, for example to retain greater control of their property. Licences are also generally viewed as being more simple and quicker and easier to negotiate and complete. Regardless of this, it is important to use a lease if that is the true arrangement.
Granting a lease from the outset ensures that the parties will have certainty of their rights and obligations. To use the examples above, a tenant will be aware of their tax liability and avoid penalties if the agreement is later found to be a lease, and the landlord could negotiate suitable lease terms to reserve any necessary rights over the property and include termination provisions before entering into the lease to ensure that they retain necessary control/flexibility.
A key feature of a commercial lease is that it will be automatically protected by the security of tenure provisions of the Landlord and Tenant Act 1954 (the ‘Act’). This means that the tenant will be entitled to statutory continuation of the lease, on similar terms (subject to reasonable modernisation) after the expiry of the contractual term.
Having a ‘protected lease’ is advantageous for a tenant as it guarantees their occupation beyond expiry of the contractual term (unless the landlord is successful in terminating the lease in accordance with the Act – not discussed in this note), saving them the time and the expense that may have otherwise been involved moving premises if they were unable to renew their lease. For a landlord however, it restricts the ability to negotiate a better deal and perhaps offer the lease to a more desirable tenant. It could also prevent them developing their premises or mean to secure possession they have to pay compensation to the Tenant. It is common practice therefore for a Landlord to serve notice on the tenant to contract the lease out of the security of tenure provisions of the Act. Correctly following this contracting-out procedure will waive the tenant’s otherwise automatic entitlement to statutory continuation of the lease and so the lease will end when the term expires (unless the parties agree to renew) giving the landlord greater flexibility and control over the future of their property.
Licence
A licence, in brief, is a personal permission for a licensee to do something on a licensor’s property. Such permission avoids the permitted act from being a trespass.
A licence does not create an estate in land so if the licensor sells the land that is subject to the licence, the licence will end (although there could be a potential claim of breach of contract for the licensee if this occurs).
Unlike a lease, the licensee will not have exclusive possession of the land. It is readily used in circumstances such as for a car parking space for an allotted time or a licence to access land to carry out works between certain times etc.
If the agreement, labelled as a ‘licence’, has all of the aspects of a lease (as described above), then it will be construed as a lease. The danger here is that if this was not anticipated at the outset, the licensor (who is in reality a Landlord) will not have carried out the contracting-out procedure as this would not have been necessary for a licence. As a result, the lease will be protected from the security of tenure provisions entitling the licensee (who is reality a tenant) to statutory continuation of the lease.
Tenancy at will
A tenancy at will is an agreement for occupation that either party can terminate at any time. This can be express or implied. As with a licence it cannot be assigned.
Tenancies at will are often used as an interim agreement where the parties are in the process of negotiating a formal agreement such as a lease.
A tenancy at will should only be used for a short period as otherwise a periodic tenancy may be inferred where there is a landlord and tenant relationship and rent is demanded at regular intervals. A periodic tenancy requires notice to be given to terminate and cannot be contracted out of the security of tenure provisions of the Act.
It is, therefore, important that the correct form of agreement is used to give the parties certainty from the outset and enable them to address issues relating to that particular form of agreement. If the arrangement is incorrectly documented the actual position will prevail and could cause issues for the parties going forward.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
