Licences and leases explained

Apr 23 2008 by Richard Freeman-Wallace for The Journal

GRANTING a licence can appear to be a quick, cheap and handy method of allowing somebody to occupy business premises, particularly where a short-term arrangement is being considered. However, such arrangements can be fraught with difficulties.

Licences need to be drawn up very carefully. Otherwise they might be interpreted in law as a lease. A licence is technically a “licence to occupy”. The business that occupies space under a licence does not have a tenancy and cannot, therefore, be described as a tenant. Nor does the occupier pay rent. Technically, the payment is a ‘licence fee’ for the use of the space.

If the licensee has exclusive occupation of the property, it will generally lead to the conclusion that a tenancy exists. That will give the tenant rights of security under the Landlord and Tenant Act 1954 and make it more difficult for a landlord to recover possession.

In a recent case, Cameron v Rolls Royce [2007], Rolls Royce occupied a property under two contracted-out leases. When the leases expired, Rolls Royce remained in occupation, while negotiations took place for new contracted-out leases, but paid no rent. Cameron and Rolls Royce also entered into “licences” to cover the period from expiry of the old leases up to the time new leases would be granted.

Rolls Royce then refused to enter into the new leases, claiming that the licences were, in fact, leases. The company referred to a 1985 case, Street v Mountford, in which the leases had the protection of the Landlord and Tenant Act 1954.

The court rejected these arguments. It said that the licence had been granted only as part of the acquisition of a larger interest and had to be viewed only as a licence and not a lease. Rolls Royce was obliged to take the new leases.

The three main differences between licences and leases are:

Length – licenses only cover a relatively short period of time – usually up to two years.

Termination – most licences give both the landlord and the occupier the right to terminate the agreement. Licensed properties with short notice periods – often one month – are often referred to as easy-in, easy-out premises.

Cost – licences are less costly to set up than leases. They will also find it much simpler and cheaper to extricate themselves if business plans do not work out and they need to retrench.

If, as landlord, you are concerned that your proposed licence might in reality be a lease, it is better to grant a lease excluding the security of tenure provisions of the 1954 Act.

You can do this by applying to the court before the granting of the formal lease. It can guarantee a landlord’s ability to recover the property at the end of the term.

Richard Freeman-Wallace is head of property at Watson Burton LLP.