UK: Sorting A Lease From A Licence

Last Updated: 6 June 2018
Article by Michael Goldfinch

A recent judgment given by the High Court earlier this year comes as a stark reminder of the difference between a lease and a licence with significant detriment to the landowner. This is not a new point of law, but is one that is becoming an increasingly pressing issue. Licences, once seen as quick, easy documents avoiding the complexities and execution formalities associated with land law, are becoming subject to disputes about their legal nature with major implications for both owners and occupiers.

Alleged arrears led to locks being changed

The case concerned the occupation of office premises at Monteagle Court by the London College of Business. The College had occupied the property since 2006 on the basis of a number of "agreements", some signed some not. The agreements purported to create a series of licences. In 2013 and 2014 there was a dispute between the landowner and the College about the sums due under the agreement. The landowner, deciding that the College was in arrears, changed the locks in September 2014 and excluded the College. Among considerations of whether the exclusion was wrongful and the amount of damages, the Court needed to consider the basis on which the College occupied the property.

Every effort was made to ensure it was a licence

The agreement made a number of efforts to ensure that it was a licence:

  • the right to occupy was declared as being personal to the College
  • the agreement called itself a licence
  • it stated that the licensor remained in occupation and that possession was deemed to remain with the licensor
  • it reserved an absolute right of entry at all times
  • it didn't use the terms "rent", "landlord", or "tenant"

...and even contained the clause "IT (sic) is agreed that this agreement constitutes a personal Licence to occupy by the Licensee and shall not be deemed to constitute a tenancy within the meaning of the Landlord and Tenant Act 1954 (as amended) or otherwise..."

...but the Court disagreed

The Court reviewed both recent case law (Arnold v Britton [2015]) and older case law (Addiscombe Garden Estates Ltd v Crabbe [1958], Street v Mountford [1985]) and came to the conclusion that the document was not a licence but was, in fact, a lease. This may appear to be a startling conclusion, given the efforts to which the parties went to ensure that the document looked and felt like a licence, but in giving his judgement, John Martin stated:

"...the court will be alert to the possibility that parties have included provisions in their written agreements whose only purpose is to disguise the fact that the reality of the situation is that a tenancy has been granted."

The Court concluded that it was not realistic for the landowner to interrupt the College's business by the exercise of a right of entry nor was it realistic that the landowner had any commercial interest in doing so. The landowner never sought to exercise the absolute right of entry contained in the successive agreements and when they did seek to enter they contacted the College to arrange such access. This finding meant that, in reality, the College had exclusive possession and since there was no special reason for the arrangement not to be a tenancy the Court determined that the agreement was a lease not a licence.

"The whole of the document must be looked at; and if, after it has been examined, the right conclusion appears to be that, whatever label may have been attached to it, it in fact conferred and imposed on the grantee in substance the rights and obligations of a tenant, and on the grantor in substance the rights and obligations of a landlord, then it must be given the appropriate effect, that is to say, it must be treated as a tenancy agreement as distinct from a mere licence". -- Addiscombe Garden Estates Ltd v Crabbe

Licence was, in fact, a lease which granted security of tenure

The consequences of this were that the lease was now subject to the Landlord and Tenant Act 1954 and in the absence of any contracting out provisions the College had gained security of tenure. Security of tenure limits the ability of landlords to deal with their property by giving tenants automatic rights to renew their leases.

If you hold property on a longer lease, it is worth noting that granting a sublease with security of tenure would often be a breach of that superior lease, and could also be in breach of banking covenants (if any). Breaching your lease in this way could lead to your landlord forfeiting the lease leaving you without a property from which to run your business; breaching banking covenants could lead to your lender demanding repayment immediately – both are consequences to be avoided.

While licences do avoid the execution formalities associated with leases, they do still have to navigate the intricacies of land law in England and Wales. While they can still be the most appropriate method of granting rights to occupy in some circumstances, landowners should now be reviewing their use and taking legal advice to ensure that any licences that are potentially leases in all but name are dealt with appropriately. If there is a risk that a licence could be a lease, it is often better to approach it head on by granting a lease and taking advantage of the contracting out procedure. There is nothing to prevent a lease being put in place quickly and it is a welcome challenge to lawyers to ensure that we are ready to respond to our clients' demands as they need us.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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