Having regard to the decision of the House of Lords in Street v Mountford, what is now the legal difference between a lease and a licence?
To a lawyer, the terms “lease” and “tenancy” are interchangeable. They both describe the rights of a person in land (as opposed to rights over land) and they both indicate that those rights are limited by reference to time (as opposed to the indefinite rights of a freehold).
A licence is defined by Megarry and Wade (Law of Real Property) as “a mere permission which makes it lawful to do what would otherwise be a trespass, for example, to lodge in someone’s house”. By contrast, a lease makes something unlawful which would otherwise be lawful (viz the entry of the landlord on to his own land). It is therefore fair to say that a lease grants prohibitions, while a licence grants permissions.
A licence prevents the licensee from becoming a trespasser, while a lease grants the tenant quiet enjoyment of his property. This right, together with other rights of the tenant, is best described as grant of “exclusive possession” (or “exclusive occupation”) to the tenant.
Street v Mountford
Before the decision of the House of Lords in Street v Mountford [5] 2 All ER 289; [1985] 1 EGLR 128, an analysis of the differences between a lease and a licence would have broadened into a very complex one, involving many fine distinctions. This particularly came to be the case after the decision of the Court of Appeal in Somma v Hazelhurst [1978] 2 All ER 1011 — where (notwithstanding the clear policy of the Rent Acts) the court held that there was no reason why an ordinary landlord should not be able to grant a licence to occupy an ordinary house exclusively. (The “licence agreement” upheld in that case subsequently became something of a pro forma method of attempting to avoid the protection given to tenants by the Rent Acts.)
Since Street v Mountford, however, it has become necessary to return to general principles of property law and to consider the substance of the rights granted over property, to see whether a licence has, in law, been granted, irrespective of the intentions of the parties.
It was conceded by both parties in Street v Mountford that exclusive possession of the property had, in fact, been granted. The difference between the decision of the Court of Appeal and the decision of the House of Lords was that the Court of Appeal held that the grant of exclusive possession was not inconsistent with the existence of a licence, whereas the House of Lords held that exclusive possession was the almost irrebuttable indication of a lease, notwithstanding that other badges of the occupancy might point towards a licence.
Lord Templeman cited (with disapproval) the following passage of Lord Denning in Shell-Mex & BP Ltd v Manchester Garages Ltd [1] 1 All ER 841 at p 843:
Broadly speaking, we have to see whether it is a personal privilege given to a person, in which case it is a licence, or whether it grants an interest in land, in which case it is a tenancy. At one time it used to be thought that exclusive possession was a decisive factor, but that is not so. It depends upon broader considerations altogether. Primarily on whether it is personal in its nature or not.
Lord Templeman went on to say [5] 2 All ER 289 at p 298:
In my opinion the agreement was only “personal in nature” and created a “personal privilege” if the agreement [in Shell-Mex] did not confer the right to exclusive possession of the filling station. No other test for distinguishing between a contractual tenancy and a contractual licence appears to be understandable or workable.
Thus in every case it must be asked whether exclusive possession is granted. By exclusive possession is meant a “stake” in the property — a right to call the property one’s own rather than to take the benefit of a mere personal privilege. If one bears this general principle in mind, then the cases since Street v Mountford will be clearer.
After Street v Mountford
In Royal Philanthropic Society v County [5] 2 EGLR 109 a teacher was allowed to occupy premises in the school where he taught and was subsequently rehoused by the governors of the school when he got married. He was not a service occupier and the new accommodation was some distance from the school. The Court of Appeal held that the teacher had been given exclusive possession of the property and was therefore a tenant. (This allowed him to remain in possession of the property notwithstanding the termination of his contract of employment.) Fox L J (following the dicta of Lord Templeman) thought that the correct test in deciding whether an occupant was a tenant or a lodger was to ask whether the landowner received an “unrestricted right of access” to the property.
This case also followed some of the earlier cases (such as Marchant v Charters [7] 1 WLR 1181 and Facchini v Bryson [1952] 1 TLR 1386) which had held that the intention of the parties as to the type of occupancy they wished to create was not usually a relevant matter — here in substance a tenancy had been created and it did not amount to a licence or any form of service occupancy. Even if many characteristics of a licence can be found, this does not affect the general presumption in favour of a tenancy whenever exclusive occupation is shown to exist. According to Lord Templeman (in Street v Mountford), the only intention which is relevant is “the intention demonstrated by the agreement to grant exclusive possession for a term at a rent”.
In Postcastle Properties Ltd v Perridge [5] 2 EGLR 107 (which was decided before Street v Mountford reached the House of Lords) it had been the intention of the landowner that the occupier should occupy the premises as a service licensee. His contract of employment was, however, terminated before he went into possession — and (he having gone into possession none the less) the court had to consider whether he was a licensee or a tenant. On the facts it was held that, at the time the present landowner had taken over the premises, the occupier had obtained a tenancy which had never been terminated.
In University of Reading v Johnson-Houghton [5] 2 EGLR 113 the Queen’s Bench Division approved Lord Templeman’s dicta in Street v Mountford that “the traditional distinction between a tenancy and a licence of land lay in the grant of land for a term at a rent with exclusive possession”. The court confirmed that the important factor was not the agreement signed (or otherwise agreed) between the parties but whether or not exclusive possession had been granted — or (as the court put it) whether or not the tenant had the right to exclude the owner.
Justice and injustice
In deciding that (whatever the parties may have agreed) the court must look at the substance of the rights granted to the occupier (intentionally or otherwise), the courts have accepted that the justice or the injustice to the landowner is a matter for Parliament, not a matter for the judges.
This is graphically illustrated by the decision of the Court of Appeal in Bretherton v Paton [6] 1 EGLR 172. In that case the occupier had been allowed to occupy property pending the outcome of negotiations to purchase it. The three indicia of a tenancy were present, namely (1) exclusive possession; (2) rent; and (3) a (periodic) term. But, on the other hand, the clear purpose of the occupancy had been to negotiate, and there had never been any intention to create a tenancy. All the circumstances indicated a “subject to sale” agreement and not a tenancy. Nevertheless, the Court of Appeal held that all parts of the test laid down by Lord Templeman in Street v Mountford had been satisfied and that, therefore, the occupier of the premises had become a tenant.
Is the licence a sham?
If the occupier is not a tenant (that is, if he has not been given exclusive possession) then, in Lord Templeman’s view, he will be a “lodger”. Later cases have shown this distinction to be an over-simplification (complicated by the fact that the word “lodger” is not a legal term). However, it is clear that where a landowner contends for the existence of a licence (rather than a tenancy) he must succeed in showing that the agreement in question is not a “sham”. Indeed, if he (or his agent) represents to the prospective occupier that a term in the agreement (denying exclusive possession) will not truly be enforced, then this representation alone will ensure that the agreement becomes a tenancy (if, in law, it was not destined to become a tenancy in any event).
Thus in Walsh v Griffiths-Jones [8] 2 All ER 1002 the plaintiffs retained an estate agent to find licensees for their empty house (pending a sale of that house on the open market). The estate agent used a form of licence agreement which, among other things, stated that the licensees would have to share the house “in common with” the plaintiffs or their invitees. When the defendants objected to this clause, the estate agent told them that it was “just a legal formality”. The defendants then signed the agreement. His Honour Judge McDonnell (Lambeth County Court) subsequently held that for this reason, among others, the agreement created a tenancy, not a licence. The only comfort he was able to give to the plaintiffs was that they should sue their estate agent for breach of his duty as agent. (This case has the rare distinction of being one of the few county court decisions to be reported in the law reports.)
In Crancour Ltd v Da Silvaesa [6] 1 EGLR 80 it was necessary to consider whether the occupier was a tenant or was a licensee living in property after a licence had expired (and thus someone against whom summary possession could be ordered under Order 113 of the Rules of the Supreme Court). The court adopted the definition of a “sham” used by Diplock LJ in Snook v London & West Riding Investments Ltd [1967] 1 All ER 518, namely:
acts done, or documents executed, by parties which are intended by them to give to third parties, or to the court, the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create.
In Street v Mountford Lord Templeman observed that an agreement which required each occupant to sign a separate agreement to share possession with each other and with invitees of the landowner could nevertheless be a sham. He criticised the Court of Appeal in Somma v Hazelhurst for failing to note that the two occupants in that case in reality enjoyed exclusive possession between them, whatever the “licence agreement” purported to say to the contrary. The occupants in that case (H and S) had been a man and a woman living together. Lord Templeman observed [5] 2 All ER 289 at p 299:
The Court of Appeal was diverted from the correct inquiries by the fact that the landlord obliged H and S to enter into separate agreements and reserved power to determine each agreement separately … The sham nature of this obligation [to share with others] would have been only slightly more obvious if H and S had been married or if the room had been furnished with a double bed instead of two single beds. If the landlord had served notice on H to leave and had required S to share the room with a strange man, the notice would only have been a disguised notice to quit on both H and S. The room was let and taken as residential accommodation with exclusive possession in order that H and S might live together in undisturbed quasi-connubial bliss making weekly payments. The agreements signed by H and S constituted the grant to H and S jointly of exclusive possession at a rent for a term for the purposes for which the room was taken and the agreement therefore created a tenancy. Although the Rent Acts must not be allowed to alter or influence the construction of an agreement, the court should, in my opinion, be astute to detect and frustrate sham devices and artificial transactions whose only object is to disguise the grant of a tenancy and to evade the Rent Acts.
The end of residential licences?
Lord Templeman tried to simplify an area which had been unnecessarily complex. In doing so he spoke of two types of residential occupation: (1) a licence (which, he felt, was synonymous with an agreement to be a “lodger”); and (2) an exclusive occupation agreement (which, he felt, would normally create a tenancy, but which might exceptionally create a licence, eg allowing a homeless person to go into occupation of premises as an act of generosity, without intending to create legal relations). Viewed this way, the judgment might create the impression that any other form of residential occupation invariably creates a tenancy.
However, in Brooker Estates v Ayers [7] 1 EGLR 50 the Court of Appeal has held that a non-lodger can still be a licensee. The case involved a landowner’s claim for possession of a flat which (in the usual form) the occupier agreed to share with such others as the landowner might “from time to time introduce”. Indeed, the occupier was (at the time of the proceedings) sharing the flat with another such person (another lady). The county court judge held that the occupier did not come within the category of “lodger”, because the landowner did not provide any board or attendance and did not have an unrestricted right of access to the premises. Accordingly, the judge held that the occupier was a tenant. On appeal, the Court of Appeal held that the judge had fallen into error. In Street v Mountford it had been conceded that the occupier had exclusive possession. In the present case there had been no such concession. In fact, no exclusive possession had been granted, and therefore the occupier (lodger or not) was only a licensee.
