Please note that property law is a complex subject and you should not rely on this article without professional advice on the facts of your case.
Although the commercial property rental market is on the mend, landlords are still anxious and, in their hurry to let out their properties sometimes enter into simple agreements without knowing the possible damages of doing so. Moreover, where the occupancies arise from a leasehold interest, there may be serious consequences to landlords who may be in breach of their own lease by not complying with any restrictions or conditions on subletting their property.
There are several ways of structuring business occupancies and the consequence of not getting it right can prove costly. The main options are either a lease or a licence to occupy. The individual circumstances will dictate which structure is suitable or possible. This article sets out the key differences between a licence and a lease, and in particular the consequences from a landlord’s perspective. It also looks at how a court interprets the parties’ intentions in the absence of certainty over the terms of the agreement.
A key point is that landlords often want to create a licence with the aim of trying to avoid giving the occupier the statutory rights under the Landlord and Tenant Act 1954 (“the 1954 Act”) which may benefit the occupier if a lease is created. Sadly, they often do not succeed.
Terminology
For the sake of clarity it is important to know the different terminology used when referring to a licence and a lease. It is worth noting that the court will disregard any labels and terminologies used for the purpose of determining whether an agreement is a licence or a lease.
Where there is a lease, the owner is known as a landlord and the occupier, a tenant. The fee paid for the occupation is known as the rent.
Where there is a licence, the owner is known as a licensor and the occupier, a licensee. The fee paid for the occupation is known as a licence fee.
Lease
The legal definition of a lease is the grant of a right to a tenant for their exclusive possession of defined premises for a determinable term at a rent. The lease agreement is, in essence, a contract between the landlord and the tenant and must therefore satisfy the principles of contract law, i.e. there must be an intention to create legal relations.
Licence
A licence is a permission granted to a licensee to do something on the owner’s land, which could include a permission to occupy. Generally a licence agreement will set out the terms and conditions on which access is granted. The licence agreement will also stipulate a fee and term for the occupation.
Key factors indicating a lease
It is important to note that a licence or a lease can arise without any written document, and in the absence of a document setting out the parties’ intentions, it can be difficult to decide whether an arrangement is a licence or a lease.
In the leading case Street v Mountford [1985] 1 A.C. 809, the House of Lords held that where the key factors below exist, then a lease or tenancy arises;
- intention to create legal relations;
- exclusive possession; and
- fixed term or periodic term at a rent
Although the case concerned residential premises, the same principles have been held to apply in the case of business premises.
Intention to create legal relations
As mentioned above, a lease is, in essence, a contract and must satisfy the principles of contract law. In the absence of express terms setting out the exact intentions of the parties, the court will consider all surrounding background. An example of this is where a tenancy arises from a leasehold interest and the headlease prohibits any subletting, the courts may assume that the landlord would not have risked breaching the terms of its lease. Consequently, the parties can only have meant for the agreement to be a licence.
Exclusive possession
Where the occupier is given the sole right to use the premises and to the exclusion of all others (including the landlord) then the occupier will almost certainly have a lease. Retaining a key and having an express provision stating that the occupier does not have exclusive possession will not suffice. The agreement must go further and reserve rights for the landlord to access certain areas in the premises or, better yet, unrestricted access over the premises. Even then the arrangement might still be a lease.
Fixed term or periodic term at a rent
Generally both a licence and a lease will stipulate a term. It is in the interest of the landlord to ensure that the term of a licence does not exceed 12 months. It is often the case that when the term of a licence has expired, the occupier remains in occupation and continues to occupy the premises on the same terms as before. In the circumstances, the continuing term may be considered as a periodic one and could give rise to a protected lease under the 1954 Act.
Key differences
The key difference between a licence and a lease which is of importance to a landlord is the security of tenure under the Landlord and Tenant Act 1954. Under this Act, a tenant occupying premises for the purposes of its business has a statutory right to renew its tenancy agreement at the end of the term. The Act also limits the grounds on which a landlord can oppose the renewal of the tenancy.
All things being equal, a tenant of a lease can enjoy the statutory protection under the Act, whereas a licence does not have this protection. It is possible to grant a lease which is not protected by the security of tenure provisions conferred by the Act. However, there are certain statutory procedures which must be followed; failure to comply with them strictly will result in the tenant having the statutory protection.
One of the main advantages of having a licence is the greater flexibility for the landlord to end the arrangement and to control the occupancy of a larger building containing a number of units.
If the occupier has not vacated the premises following the expiration of the notice to terminate, it may be possible to obtain a court order for vacant possession. Where there is a right of re-entry it may be possible to instruct bailiffs to enter the property and change the locks, without a court order. However, for the sake of certainty it will be sensible to obtain a court order before proceeding with an eviction.
In general a lease will normally have a right of re-entry, known as the forfeiture clause, which can be activated on certain breaches and in particular non payment of rent. It is important to note that where there is no forfeiture provision, there will be no right of re-entry. If the lease is forfeited in these circumstances, the tenant can obtain an injunction to seek relief from the forfeiture and claim damages for losses caused by the illegality of the re-entry.
Summary
It is crucial to seek advice when considering structuring business occupancies. Getting involved in lengthy discussions over whether an agreement is a lease or a licence can be costly. Moreover, where there is no formal documentation of the arrangement to occupy the premises, there is a risk of a lease arising, and one which is protected under the Act. In these circumstances, the landlord will only be able to oppose the renewal of the tenancy on limited grounds.
It is important to check the terms of any existing lease, from which the business occupancies are to be granted, to ensure that the landlord has complied with the terms of its lease. Moreover, any underlease granted from an existing lease must have a termination date which would enable the landlord to give vacant possession on termination of its lease. Otherwise, the head landlord could have a claim for compensation under the terms of the headlease.
There are several factors to consider when structuring business occupancies and it is not worth cutting corners. Entering into tenancy agreements without legal advice could have substantial costs implications in the long haul.
Sykes Anderson has both experience and knowledge of commercial property law, and in particular the structures available to dealing with business occupancies. We can assist you with and has advised many individuals with such structures. We can assist you with putting in place a suitable structure to benefit your circumstances, and whilst most of the tax planning work is dealt with by us we do consult other professionals as needed in those jurisdictions.
September 2011
Roger Hahn
Solicitor
Andinee Pillay
Trainee solicitor
Sykes Anderson LLP
9 Devonshire Square
London EC2M 4YF
Telephone 020 3178 3770
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