One of the things that we get asked as Real Estate Solicitors is to help our Landlord Clients get Tenants into occupation of their commercial premises within a matter of days. Even the best of us will have trouble settling a Lease in a few days, so often the idea is mooted to put the Tenant in “under Licence” as a short-term measure. Sometimes, other commercially sound circumstances may give rise to the use of a Licence to govern occupancy of a Property instead of a Lease.
What many will not be aware of, however, is that it does not matter whether you call your document a Licence, it is all a question of its substance. To determine whether a document governing a Tenant’s occupation is therefore a Lease or a Licence you will need to look at the reality of the situation.
The hallmarks of what the Courts will consider a Lease are set down in the 1985 case of Street v Mountford and so have been preserved for some 35 years and yet this Lease/Licence distinction continues to be litigated today. The case sets out three key qualities of a Lease namely: –
- Exclusive possession;
- For a term that is either fixed or periodic; and
- At a rent (although take note that not charging rent will not necessarily save you as it is possible for a Lease to be granted without a rent).
Usually “exclusive possession” is the point of debate (is the Tenant entitled to occupy the space and exclude all others including the owner).
Owners have occasionally tried come up to with quite creative ways to avoid this exclusive possession point such as including a provision to say that the Tenant cannot use the property for a given period in each day. Whilst this does have some chance of being seen as an indication that exclusive possession has not actually been granted, again we must look at the substance rather than the form.
You may wonder why the distinction is so important and the issue revolves around the provisions of the Landlord and Tenant Act 1954 (“the 1954 Act”). If the Owner allows the Tenant into occupation under Licence, but in reality, we have a Lease, then that Lease is unlikely to have been contracted out of the protection of the 1954 Act. This means that the Tenant has certain rights enshrined in the 1954 Act that make it quite difficult for the Landlord to get back possession of the land if they want to use it for other purposes which could inadvertently interfere with the Owner’s plans to redevelopment the land and/or could have an impact on its value.
Bear in mind that there are issues for potential Tenants who think they are Licensees as well – the structure of the deal may inadvertently trigger a stamp duty land tax liability and duty should have been paid and has not been. Statutory obligations such as the relatively new minimum energy efficiency standards regime may have been breached and other statutory obligations may cause concern for Tenants.
When you are thinking about letting someone into occupation of your land you may have very good reasons for thinking a Licence is the way to go. However, a note of caution, whilst Licences may seem cheap and pragmatic, care should always be taken because the unintended consequences can be severe and are impossible to undo retrospectively.
Danii Jhurry-Wright. Partner, Commercial Property and Business Services dept.
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