Lease or licence – what’s the difference and why does it matter?

If you occupy commercial property, it is fundamental that you understand the legal basis of your right to be there. In almost every case this will be pursuant to a written document referred to as 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 that the distinction between the two can be blurred, as some agreements which are stated to be licences have nevertheless been held by the court to be 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 of time. In return for this, the tenant will pay rent to the landlord.

The lease will also outline the rights and responsibilities of both parties during the period of the lease. Typically, this will include specific situations when the landlord has rights of entry onto the property. Subject to those preserved rights, during the period of the lease the tenant has the right to exclusive possession.

Just like a freehold, a leasehold interest can be bought and sold.

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 cannot be bought and sold. 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 all of the clear disadvantages of a licence, particularly for the occupier, there are nevertheless some scenarios where they may be more suitable than a lease. They can be granted quickly and cheaply, so a licence may be appropriate where only very short-term occupation is required. A good example would be a retailer who wishes to set up shop temporarily for just a few weeks leading up to Christmas. In that situation, if the owner of vacant retail premises is struggling to find a longer-term tenant, granting 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 by the parties is unimportant. Rather, following the judgment of the Court of Appeal in the case of Addiscombe Garden Estates v Crabbe (1958), the court will consider the document as a whole, together with the facts of the case, and apply the following 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 recent and cautionary example of a case where this test was applied was London College of Business Limited v Tareem Limited (2018). In that case, the property owner had made every effort to ensure they were granting 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 possession was deemed to remain 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 may be 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 that it was never going to 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. Through successive “licence” agreements the property owner had never sought to exercise the absolute right of entry contained in each of the agreements, 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 as there was no special reason for the arrangement not to be a tenancy, it was held that the agreement was a lease, not a licence.