Licences – a quick solution may cause lengthy problems
A licence is an arrangement that can be used to document the occupation of a premises, and is often seen as a "quick fix". However, if it is not handled carefully, the occupier may have the rights to stay in the premises indefinitely.
A licence grants a personal right or permission for a party to 'occupy'. Generally, a licence is used to cover short periods of occupation and can be used as a short-term solution. Alternatively, it can be used as a temporary solution whilst the terms of a formal lease are being agreed upon by solicitors. As such, when handled with care, a licence serves as a useful tool for property owners.
However, there is a risk that when a property owner agrees to grant a licence, the property owner can inadvertently grant a 'lease in disguise'. This is because, case law has concluded that even if a document is called a 'licence', if it has the characteristics of a 'lease' it will be considered a lease. A key characteristic as to whether an arrangement is a licence or a lease, is whether the occupying party has a right of 'exclusive use' of the premises. In other words, can the occupier lock the property owner out of the premises?
It is important to understand whether a licence or a lease has been agreed upon because a property owner may unconsciously grant an occupier statutory rights. More specifically the right for the tenant to remain in the premises and renew its tenancy at the end of the term. This is known as security of tenure.
The Landlord and Tenant 1954 Act (the 1954 Act) provides that business tenants have a right to renew the lease on the same terms as the previous lease unless a landlord can prove certain statutory grounds to refuse the new lease. The key point here is that the 1954 Act only applies to leases and does not apply to licences. If the statutory grounds cannot be proven, the occupier cannot be forced to vacate the premises. On some occasions even where a statutory ground is proven, the property owner may be required to pay financial compensation to the occupier when the lease finally does come to an end.
Therefore, it is in a property owner's interest to ensure the licence is actually a licence in practice, but if it is a lease, it is important to ensure an occupier does not have security of tenure. When agreeing to enter a lease, without security of tenure, both parties must agree before the start of the lease to opt-out of sections 24 to 28 of the 1954 Act and follow the formal procedure. This is known as 'contracting out' and it is a relatively simple process.
So where does the risk lie? If the property owner believes a licence has been granted, without any security of tenure (because the 1954 Act does not apply to licences), but in fact, it is later deemed to be a lease, the property owner has inadvertently granted a lease with security of tenure (because it has not been opted out). Therefore, the intention to grant occupation over a short period will lead to a right for the occupier to stay in the premises indefinitely.
If the arrangement is a licence in practice, the occupier/property owner will have few rights and obligations and generally speaking the licence can be revoked through giving notice of revocation to the licensee giving them a reasonable time to leave the property. If the property owner wants to grant a licence, it is strongly advised to take legal advice to ensure that the rights granted are those intended.
From a occupiers' perspective, agreeing to a licence can also pose a risk. As mentioned above the difference between a lease and a licence is that for an arrangement to be construed as a licence the occupier must not be given exclusive possession of the premises. Therefore, licences are usually prepared on this basis and incorporate express terms to ensure that the occupier is not given “exclusive possession”. This means the property owner must have the right to relocate the occupier to any other premises and the occupier must not be able to exclude the property owner from the use of the premises while the occupier is in occupation. This is likely to be unappealing to an occupier.
Granting a licence may seem like a quick solution, but in our experience taking this type of shortcut can lead to problems. Therefore, it will almost always be best to have legal certainty from the outset by obtaining legal advice when negotiating terms for a commercial premises to ensure the arrangement mirrors the intentions of the parties.