To lease or to licence?

The difference between a lease and a licence to occupy should be understood at the outset. Stewart Gregory explains about the lease licence dilemma, your rights and the vulnerabilities.

How best to document the short-term occupancy of a particular party in healthcare property is an important consideration.

A licence can seem a quick, easy way to grant a right to occupy property, but problems can be created by its inappropriate use.

To see if a lease or licence is more appropriate for a particular occupancy, let us look at first principles.

A lease is the grant of a right to the exclusive possession of land for a determinable period of time. Note ‘exclusive possession’: the key element of a lease in this context.

Someone is said to have exclusive possession if they can enjoy the property as though they were the landowner and exclude both the landlord and third parties from the property. A lease therefore creates an interest in land, a licence does not.

A licence simply gives permission to a licensee to do something on the licensor’s property that would otherwise be an unlawful trespass. It is therefore a personal contractual right or permission and does not give the licensee the right to exclude the licensor from the property.

A tenancy at will is another possibility for a short-term occupancy arrangement and can be very similar to a licence. A tenancy at will exists where there is a tenancy on terms that either party can bring to an end at any time.

It is again a personal relationship between the original landlord and tenant and cannot be transferred. It is useful where parties are in negotiation for the grant of a lease and want to document a short-term occupational arrangement while the lease is negotiated and completed.

Great care is needed: if not properly drawn up it can instead create a periodic tenancy, which can have serious consequences when it comes to terminating the arrangement.

Labelling a document a lease or a licence has little bearing on what it actually is: if exclusive possession is granted by the arrangement a lease can come into existence. Cases over many years have debated the distinction.

The leading case is a decision of the House of Lords in Street v Mountford, 1985. To summarise:

‘If the agreement satisfied all the requirements of a tenancy, then the agreement produced a tenancy and the parties cannot alter the effect of the agreement by insisting that they only created a licence’.

That decision has been reinforced in recent cases. The effect is: ‘If the arrangement has the characteristics of a lease, then it is a lease, irrespective of what you have called it’.

But why is all this important?

The crucial issue is the occupier’s security of tenure. When properly drawn up, a licence and a tenancy at will do not give the occupier security of tenure.

Generally, a tenant who occupies property under a lease for the purposes of its business has statutory rights to renew its tenancy at the end of the term. The landlord can only oppose that renewal on certain limited statutory grounds.

A lease can be granted that does not give the tenant security of tenure, but this can only be done either by:

• ‘contracting out’ the lease from the security of tenure provisions before the lease is granted, or
• by granting a lease that is exempt from those provisions – which, in healthcare, really means only granting certain tenancies for not more than six months.

This can make licences and tenancies at will seem attractive when the occupier wants a short-term arrangement.

What happens if a tenancy inadvertently arises from the arrangement?

A lease can only be contracted out of security of tenure before it is entered into. If the parties believe they are only entering into a licence they will not go through the statutory required procedure to contract that arrangement out of the security of tenure provisions.

If it is subsequently held to be a tenancy, because the occupier actually enjoys exclusive possession, the tenant will have security of tenure, making it difficult for the landowner to terminate the arrangement.

Can a licence ever be safely used?

It might seem not, but remember, a court will look at all the landowner’s rights and powers when determining whether an arrangement contains a grant of exclusive possession. While they are not conclusive, here are examples of provisions in documents that courts have interpreted as meaning only a licence had been granted:

• provisions preventing the occupier from interfering with the owner’s right to possession and control of the premises. Such a provision is inconsistent with the grant of exclusive possession;

• provisions allowing the licensor to make alterations to the premises. That would require a significant degree of physical control over the premises inconsistent with an occupier’s exclusive right to possession;

• the absence of a right for the landowner to enter the property. If it is a licence then the landowner retains control of the premises at all times, so no need for a right to enter;

• provisions entitling the owner to require the occupier to transfer to other property selected by the owner. This has been held to negate the grant of exclusive possession; and

• provisions that restrict the use of the property to certain hours or only part of a day.

These can all be used to drive a document towards being a licence, but if in reality the occupier enjoys exclusive occupation, to the exclusion of the owner, then no matter how many are used, the arrangement will have been the grant of a lease.

Adverse tax consequences can also arise from inadvertently creating a tenancy. Tenancies at will and licences are exempt interests, outside the scope of SDLT (LTT in Wales), so no SDLT or LTT is payable, and no return is required.

However, the grant of a lease is not an exempt interest: if the arrangement is in fact a lease, it may be subject to SDLT or LTT.

Adverse VAT implications may also arise if not properly considered and dealt with in the arrangement.

Conclusions

A lease gives a tenant certainty as an occupier, and the landowner a secure period of income.

If the lease is properly contracted out (or is of a certain type for not more than six months), the landlord will be entitled to possession of its property at the end of the term, with protection from spurious claims from the tenant. If flexibility is required, a mutual rolling break clause can be used.

Leases usually take longer to negotiate than licences, costing more to produce.

No matter what the document is called, if exclusive possession is granted, the owner risks the arrangement being challenged by the occupier.

A licence cannot be terminated ‘at will’, giving a licensee more security than a tenancy at will: the circumstances in which the owner can terminate a licence will be set out. There is generally no SDLT or LTT payable on a licence and, if properly constituted, it does not attract security of tenure.

Finally, if a tenancy at will is appropriate, it can be prepared quickly and cheaply because it is a short document. Properly drawn, it will not attract security of tenure and allows the landlord to get the property back immediately at any time.

However, it offers no security of income for the landlord as the tenant can also terminate the agreement immediately at any time.

Getting the right arrangement for any set of circumstances is crucial to avoid unforeseen issues.