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Is it a lease or a licence?

09 Apr 2012

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. With so much empty business space and landlords competing for occupiers, it can be tempting to secure an occupier regardless of the terms, particularly if the landlord wants the flexibility to remove the occupier at relatively short notice. 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. Just because a document is described as a “licence” does not make it one. If it looks like a spade, feels like a spade and is used like a spade, then it is a spade, even if you call it a fork.

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.

It is, therefore, important that such exclusive occupation should come under the terms of a lease and not a licence, and that the lease is granted in such a way as to prevent security of tenure being acquired.

A licence needs to be drafted carefully, so that it does not fall within the definition of a lease. 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. There is no reason why a lease cannot be granted for as short a period as 12 months. 

These days, the procedures to exclude the occupier’s rights under the 1954 Act are more simple than in the past. All that is required is that the landlord serves the occupier with a notice in the correct form, before the lease is granted or the occupier otherwise becomes legally bound to take the lease. The occupier will then need to sign or swear a declaration before a solicitor.  The declaration in effect confirms that the tenant has receive the notice and understands what he is doing.

Licences can be effective but it is important to take legal advice before doing so. There are many factors that need to be considered.

For further information, please contact Richard Freeman-Wallace on 0191 232 8345 or email richard.freeman-wallace@hay-kilner.co.uk.