Lease or Licence?

It is a common misconception that granting a Licence to occupy rather than a Lease gives the occupier less legal protection and promotes flexibility. In fact the unintended consequence can be quite the reverse.

In the context of commercial property, the issue is whether the occupation might attract the protection of the Landlord and Tenant Act 1954.  Such secure business tenancies confer rights on the tenant to remain on the premises following the contractual expiry date, to request a renewal lease on essentially the same terms, and in many cases to obtain financial compensation from the owner (where a renewal is not granted).

A true Licence will not attract the protection of the Act. However, a Licence will not be a true Licence if it grants the occupier exclusive possession of premises.  Exclusive possession means that the occupier has the right to exclude third parties and is not sharing the premises with the owner or anyone else. An occupier is protected by the Act after 6 months.

Accordingly, by granting any Licence of more than 6 months to occupy for business purposes, owners will be exposing themselves to the risk that the occupier could claim a secure business tenancy. This may have implications for the owner's medium or longer term plans for the premises (including its ability to redevelop or regain vacant possession of them).

It may be that some occupiers will ask to take a Licence rather than a Lease.  Their reasons for doing so may include the following:

  • Stamp Duty Land Tax is not payable upon Licences, whereas it is often payable on Leases.
  • An occupier under a Licence does not normally have to pay business rates, whereas a tenant under a Lease does. 
  • A Licence format may also simply be more familiar to them. 

However, owners should think carefully about such requests.

The issue is not a purely theoretical one. In 2002, National Car Parks (NCP) forced one landowner to pursue his claim for vacant possession to the Court of Appeal using the secure business tenancy argument. This was the case even though NCP were in occupation under a Licence, the Licence clearly stated that it was not intended to give NCP any legal interest in the premises, and NCP had had the benefit of legal advice. Although the landowner was ultimately successful, he was still exposed to costs and delay.

Therefore unless there are good reasons to grant a Licence (for example, if there will be genuine sharing of occupation) then the safe course of action is for owners to grant the occupier a Lease instead.  If the arrangement may last for more than 6 months, that Lease can be safely 'contracted out' of the secure business tenancy regime by the owner and the occupier simply exchanging a Notice and a Declaration in the appropriate forms.

The law in this area is complex and not all the issues can be summarised in an article of this length. If you are in need of advice please contact Tom Brearley, who is a senior solicitor at Michelmores, on 01392 687554 or tom.brearley@michelmores.com