Head of Commercial Property, Caroline Entwistle, explains the crucial difference between a commercial lease and a licence and why landlords must ensure they do not unintentionally create a lease.
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Lease or licence – what’s the difference?
If you occupy commercial property, it’s fundamental to understand the legal basis of your right to be there. In almost every case, this is under a written document called either a lease or a licence. But they are very different creatures, and problems arise if you are unsure of your specific rights and obligations. And beware, the distinction between the two can be blurred. That’s because the court has held that some agreements stated as licences are actually leases.
What is a lease?
A commercial lease is a legally binding contract between a business tenant and a landlord. The lease gives the tenant the right to use the property for business or commercial activity for a specified period. In return, the tenant pays rent to the landlord.
The lease also outlines both parties’ rights and responsibilities during the period of the lease. Typically, this includes specific situations when the landlord has rights of entry onto the property. Subject to those preserved rights, the tenant has the right to exclusive possession during the lease period.
And just like a freehold, you can buy and sell a lease.
Find out more about commercial leases
What is a licence?
Unlike a lease, a licence is simply a personal, contractual permission to occupy property. It does not confer any property rights, and you cannot buy or sell a licence. Crucially, a licence provides no security of tenure, so the licensee occupies entirely at the pleasure of the licensor. If the licensor disposes of their interest in the property, the licensee’s right of occupation ceases immediately.
Despite the clear disadvantages of a licence, particularly for the occupier, there are nevertheless some scenarios where they may be more suitable than a lease. In particular, a property owner can grant a licence quickly and cheaply, which may be appropriate where the licensee requires only very short-term occupation. A good example would be a retailer wishing to set up shop temporarily for just a few weeks before Christmas. In that situation, if the owner of vacant retail premises cannot find a longer-term tenant, a temporary licence may suit both parties’ short-term interests.
Property owners beware…
However, in all cases where property owners seek to grant a licence, they should exercise considerable caution lest they inadvertently grant a lease. Should that happen, the occupier will benefit from a degree of statutory protection under the Landlord and Tenant Act 1954.
In deciding whether an agreement amounts to a licence or a lease, the label given to the document is unimportant. Rather, the court considers the document as a whole, together with the facts of the case. The judgment of the Court of Appeal in the case of Addiscombe Garden Estates v Crabbe (1958) sets out the test:
“(if) the right conclusion appears to be that, whatever label may have been attached to it, it in fact conferred and imposed on the grantee in substance the rights and obligations of a tenant, and on the grantor in substance the rights and obligations of a landlord, then it must be given the appropriate effect, that is to say, it must be treated as a tenancy agreement as distinct from a mere licence.”
A cautionary tale
The case of London College of Business Limited v Tareem Limited (2018) is a cautionary example of the application of this test. Here, the property owner had made every effort to ensure they granted a licence, including:
- not using the terms “rent”, “landlord”, or “tenant”;
- declaring the right to occupy as being personal to the property owner;
- reserving to the owner an absolute right of entry at all times;
- the agreement calling itself a “licence”;
- stating that the licensor remained in occupation and that deemed possession remained with the licensor.
The document even contained the clause:
“It is agreed that this agreement constitutes a personal Licence to occupy by the Licensee and shall not be deemed to constitute a tenancy within the meaning of the Landlord and Tenant Act 1954 (as amended) or otherwise…”
At first glance, it’s difficult to see what more the property owner could have done to create a licence. But having considered the facts of the case, the judge disagreed, saying:
“…the court will be alert to the possibility that parties have included provisions in their written agreements whose only purpose is to disguise the fact that the reality of the situation is that a tenancy has been granted.”
The judge found it would never be realistic for the property owner to interrupt their business to exercise a right of entry. Nor was it realistic that they had any commercial interest in doing so. Furthermore, through successive “licence” agreements, the property owner had never sought to exercise the absolute right of entry contained in each agreement. And when they did eventually seek to enter, they first contacted the occupier to arrange access.
In light of this, the court found that in reality, the occupier had exclusive possession. And there was no special reason for the arrangement not to be a tenancy. Consequently, the court held the agreement was a lease, not a licence.