Ben Johnston and Richard Housley discuss the pros and cons of three common types of agreement governing short-term occupation of property
There are three principal ways by which landowners can document short-term occupation of their property: by way of a lease, a licence to occupy or a tenancy at will. This article will focus on the key differences between these arrangements, some of the advantages and disadvantages of each type and the potential consequences of using the wrong one.
Lease
A lease is a contract in which a landowner (the landlord) grants to an occupier (the tenant) the right to use the landlord’s property for a specified period of time, usually in exchange for rent. As well as being a contractual relationship between the original parties, a lease is also an estate in land. It is therefore capable of existing independently of the initial contract and can be transferred by either party to a new landlord or new tenant, as the case may be.
A key characteristic of leases is that of exclusive possession. A tenant enjoys exclusive possession of property if it is able to exercise the rights of the landowner and exclude both the landlord and third parties from the property, unless and to the extent that the landlord has reserved rights under the lease to enter its property (for example, to inspect its state of repair or in order to carry out repairs to adjoining land).
When the contractual term of a lease ends, a business tenant may acquire security of tenure under Part II of the Landlord and Tenant Act 1954 (“LTA 1954”) which gives the tenant a statutory right to remain in occupation and a right to renew its lease at the end of the term, unless the relevant provisions of the LTA 1954 have been specifically excluded.
Where a landowner and occupier are prepared to commit to an arrangement for any significant period of time (for example, more than six months) and the occupier is going to have exclusive possession of the property, one would typically use a lease. An example would include a shopping centre owner granting a lease to a retailer to use a unit in the shopping centre. The advantages of a lease are that it provides the landlord with a secure period of income while at the same time giving the tenant some security and certainty that it can exclusively possess the property for a fixed period of time.
Perhaps the main perceived disadvantage of using a lease is that it is typically a longer document than a licence to occupy or tenancy at will, and as a consequence parties may spend more time and money putting it in place. Depending on the length of the lease term and the rent payable, stamp duty land tax may also need to be paid by the tenant.
Licence to occupy
An occupational licence is simply a personal arrangement by which a landowner (the licensor) gives an occupier (the licensee) permission to use the licensor’s property in a particular way. The permission prevents the licensee from committing a trespass.
Like a lease, a licence can be for a fixed period of time and can also reserve a payment (a licence fee), but unlike a lease, a true licence to occupy does not grant the licensee exclusive possession nor does it create an estate in land. So, at any time during the licence period, the licensor can freely enter its property or require the licensee to occupy a different area than that which was being used initially.
The duration of a licence and how it may come to an end will depend on its terms, but it will typically require one party to give a fixed period of notice to the other, rather than allowing either party to terminate the licence immediately.
A licence to occupy will be suitable to use in a scenario where the occupier will genuinely have no exclusive possession of the property. An example would include circumstances in which a large retailer grants permission to a smaller retailer to operate a concession within its department store, or where a shopping centre owner allows parties to use areas of the shopping mall for one-off events such as performing live music or fundraising for charity.
The advantages of using a licence to occupy are that it gives a licensor some certainty of income, depending on the terms of the document, and the licensee some certainty that they can occupy the property for a period of time, while still being a flexible arrangement. A true licence to occupy also falls outside of the scope of the LTA 1954 and so would not confer security of tenure on the licensee.
However, there are some disadvantages for both landowners and occupiers. A licensee’s occupation is somewhat
precarious given that a licence is not an estate in land, and so will end automatically if the licensor sells its property. A potential trap for the landowner is that, even where the document is called a licence, case law has made it clear that the label given to a document does not determine the nature of the arrangement. If, in reality, the occupier has exclusive possession of the property, then the landowner has granted the occupier a lease which may fall within the security of tenure provisions of the LTA 1954.
Tenancy at will
A tenancy at will is an arrangement which is capable of being terminated by either party on immediate notice at any time and for any (or no) reason. Termination may be express (for example, in writing) or by implication (for example, the landlord demanding that the tenant return keys). Where a landlord has terminated the tenancy at will, then while the arrangement will end immediately, the tenant should be afforded a reasonable period of time to enter the property after the end of the tenancy so that it can remove its belongings. Although it may seem sensible to do so, including any wording in the tenancy at will which requires a party to give a period of notice to end the tenancy will typically invalidate it, and could mean that the document is construed as a periodic tenancy, which could have protection under the LTA 1954, instead of a tenancy at will.
Like a licence to occupy, a tenancy at will is a personal relationship between the original parties – it does not create any estate in land and it cannot be assigned. Unlike a licence, a tenancy at will does provide the tenant with exclusive possession.
Where neither the landlord nor the tenant wish to commit to any minimum period of occupation but instead seek to retain maximum flexibility, a tenancy at will is typically the most suitable
arrangement to put in place. It is also sometimes used to facilitate a tenant taking up early occupation while the parties continue to negotiate a longer term lease of the property. The clear advantages of a tenancy at will are its flexibility and the fact that, as it is usually a short document, it can typically be put in place relatively quickly and cost-effectively. Also, as with a true licence to occupy, the security of tenure provisions of the LTA 1954 will not apply to a tenancy at will. The flexibility that the arrangement offers is perhaps also its biggest disadvantage – a tenant has no certainty that it can remain in occupation as the landlord can terminate the tenancy immediately at any time and similarly the landlord is given no guarantee that it has a secured rental income.
Why this matters: an example
A property owner is trying to generate income from vacant parts of an office building until it is ready to sell. The owner grants occupiers “licences” to use certain suites of rooms, with the documents stating that the owner can designate a different suite at its discretion on 10 working days’ notice.
The property owner enters into a conditional contract with a developer to sell the building. The conditions are that the developer must obtain a certain type of planning permission and the owner must give up vacant possession. The planning process moves forward slowly and the owner pays little attention to how its building is used. The owner’s office manager accidentally hands over all the keys to one of the suites to Occupier A without retaining a set, and is then too busy to recover a set. The owner is unconcerned as long as the occupiers keep paying. The owner never re-designates the office suites and, in reality, Occupier A has exclusive possession of the suite.
The developer obtains planning permission, triggering a deadline for the owner to obtain vacant possession and prompting it to serve notices to terminate the licences. Occupier A seeks legal advice as it fears it will not be able to relocate in time, and its solicitors realise that it has an arguable case that it has a periodic tenancy which would have acquired protection under 1954 Act.
Occupier A refuses to vacate when the notice served by the owner under the “licence” expires. The owner is conscious that the developer would be able to terminate the purchase contract before it could hope to obtain possession from a tenant with LTA 1954 rights and, after negotiating, makes a substantial offer to Occupier A to vacate. The occupier accepts and vacates in time for the owner to comply with its vacant possession condition and complete its sale. However, it has lost a substantial amount of the profit it hoped to make, and could have avoided the situation by granting an excluded tenancy or a tenancy at will.
Further reading
Street v Mountford [1985] AC 809; [1985] 1 EGLR 128
Woodfall: Landlord and Tenant Vol 1, Sweet & Maxwell
Megarry & Wade: The Law of Real Property (8th edition), Sweet & Maxwell
Ben Johnston is a managing associate and Richard Housley is an associate at Cripps
