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Lease or licence? A crucial distinction

Businessman verifying the documents Print publication

10/09/2018

The legal distinction between a lease and a licence is a crucial one, which can have very significant implications for any retailer owning or occupying commercial premises. Walker Morris’ specialist Real Estate Litigator David Manda explains and offers practical advice.

The lease/licence distinction…

If a person or business occupies premises, the freehold or superior interest of which is owned by somebody else: (a) for a term (that is, for a fixed period or for a period which can be ascertained by reference to a termination notice period); and (b) exclusively (that is, without interruption and with the ability to exclude the owner or any other party at any or at certain times) then, regardless as to how the occupation arrangement is named, documented or otherwise referred to, it will be a lease, as opposed to a mere licence.

The distinction is important for a number of reasons. In particular, a licence is simply a personal, contractual permission for the licensee to do something – in this context to occupy land.  A licence does not confer any proprietorial rights, it cannot be assigned and it does not survive any change in the ownership of the freehold/superior interest.  Crucially, a licence does not confer any security of tenure, and so a licensee’s position is precarious.

In contrast, a lease (or a tenancy, those terms are interchangeable) is much more than a contractual permission – it is an estate in land. A lease can therefore be bought and sold; it survives changes in ownership of any superior interests in the land; and, where it is a lease of commercial premises and the requirements of Part II of the Landlord and Tenant Act 1954 (the 1954 Act) are met, it affords the tenant security.  That means that the tenant’s occupation cannot be brought to an end, even following expiry of the lease term, unless and until the landlord can establish (at court if necessary) one or more of certain limited statutory grounds for repossession.

…can be crucial – especially in the retail context

A misunderstanding on the part of the land owner or occupier as to the correct legal nature of any occupation of commercial premises can have devastating consequences.

A common scenario arises where a freehold owner wishes to recover possession of its premises quickly for a particular reason and believes that it can do so simply by giving a [short] period of notice as per the “licence” arrangement.  Such plans can be scuppered entirely when it comes to light that the occupation arrangement is, in fact, a 1954 Act-protected lease which cannot be terminated without the owner giving a minimum of six months’ notice and being able to prove (if necessary at a full court trial which could take many months to prepare and to come to fruition) one of the statutory grounds.  In some circumstances, even where a statutory ground is made out, the owner/landlord can also be liable to pay financial compensation to the protected occupier/tenant when the lease finally does come to an end.

From an occupier’s perspective, one of a business’ most valuable assets can be its goodwill which, more often than not, attaches to its premises and location. If an occupier is unexpectedly forced to depart, the disruption and damage to its business can be significant.

In the retail context, lease/licence confusion can arise in a variety of situations. Common areas of risk (non-exhaustively) include where retailers occupy premises and commence trading prior to completion of formal documentation; short-term, seasonal or pop-up arrangements; and space-sharing, concession or ‘sub-letting’ arrangements which are not properly documented.

Practical advice

In an uncertain climate, landlords can increasingly face void units – along with the rates and repair liability that that entails; and retailers can be reluctant to enter formal long-term leases. Financial pressures and the desire for flexibility therefore often prompt parties to enter informal occupation arrangements.  If done properly, those solutions can represent a real win:win; but if not, the consequences can be devastating.  When it comes to occupation arrangements, remember the adage ‘a stitch in time saves nine‘ and put the proper documentation in place.

For further information or advice, please do not hesitate to contact David Manda or any member of Walker Morris’ Real Estate Litigation or Retail teams.

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[1] [1985] 1 EGLR 128
[2] and usually at a rent, although this latter is not necessarily essential/determinative

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