Legal matters: terminology, lease or licence, what’s the difference?

Yes, legal terms confuse and like many specialisms, the confusion is added to by the fact that different terms often have essentially the same meaning.

Here, Tom Entwistle explains some of the jargon sitting behind the property laws in England.

For example a lease and a tenancy agreement are effectively the same thing, a legal agreement between a landlord and a tenant: it’s a contract but because it’s property, it is something more than a contract. Tenancy agreement is the term more often associated with, and in accepted use with, a residential letting, whereas a lease is generally use in relation to a commercial tenancy, and in this case is often for in excess of three years.

A lease in excess of three years must be signed as a deed whereas the average residential letting need not be.

There’s even confusion about terms such as “to rent” or “to let”. Landlords do the letting whereas tenants do the renting, but very often you see the term used, implying that landlords do the renting. Renting-out may be a more appropriate term to describe what a landlord does, but letting is the correct usage.

The origin of the word “let” or “to let” is from the Old English term “lætan” (Northumbrian leta) “to allow; to leave behind, depart from; leave undone; bequeath, or to let go”. Also, in relation to property, accepted usage means “to put to rent or hire”

Other terms often confuse, for example a tenancy agreement, letting agreement, letting contract, rental agreement, lease. Effectively they all mean the same thing. These terms are used interchangeably by landlords, tenants and property professionals alike, so unless you are familiar with them, they understandably can be confusing.

In agricultural lettings, where the property is used as an agricultural (farming) business, leases or tenancies are known in legal terms as “farm tenancies” or “farm business tenancies”. The distinction here is important because a farm tenancy gives much more security to the tenant than does the later devised concept of a farm business tenancy.

Property laws are some of the oldest in the land, stemming in the main from the earliest times when administrative laws started to be recognised in England, that is, from the time of the Normans.

Property law in England and Wales certainly has its roots in antiquity.

Property law governs the various forms of ownership in real property (land) as well as personal property, including intellectual property. In a property owning democracy the legal system protects property owners rights and their claims to resources, such as land and personal property. The English common law system was one of the pioneers of this system and much copied around the world.

In the middle ages all property was owned by the monarch and it was devolved through feudal land tenure, a feudal system of loyalty and fealty in a hierarchy of power. More recently, property is exchanged (bought and sold) through contract law, and where property is violated, individuals can sue under the law of tort to protect it.

The common law is law declared by judges, derived from custom and practice and the precedents that they set. The courts apply the principles set in previous cases (test cases) decided by senior courts. However, common law rules may be “trumped” by Parliament made laws, new legislation and regulations always taking precedence over the common law, such as contractual arrangements.

In practice, statutory rules made in Parliament, Acts of Parliament will therefore override ancient common law and contract, and decisions made by the courts set precedents that inform future court disputes.

There exists a slow and incremental process of legal decisions, judge by judge, case by case, and seemingly endless statements when appeals are made and test cases arise. New rules and regulations pour out of Parliament as new laws are made and subsequently interpreted and changed in the light of practical experience.

Under the English legal system tenancy laws are a curious mixture of the law of contract, specific property law decisions, and statutory rules.

Renting (or letting) is therefore based on a contractual arrangement governed by statutory rules whereby a tenant occupies and gains a “legal interest in land”, exclusively, for a specified period of time, usually in return for the payment of rent.

So, what’s the difference between a lease and licence?

A lease, (tenancy agreement) (tenancy contract) gives the tenant exclusive possession of the land (and a building that’s on it) for a specific period of time. It has the intention to create an ‘estate in land’, a legal interest, meaning the tenant under common law can exclude anyone and everyone from the land during the tenancy term, even the landlord.

Also, the lease can be transferred (assigned to another tenant), sub-let, or licensed to someone else, usually only with the permission of the head landlord. Assignments etc. are only usual in commercial lettings but they are possible in residential tenancies (see what I mean about interchangeable terms). The same legal principles established in the one generally apply to the other.

A licence situation is a different animal to a tenancy, in law. The licence does not confer any sort of legal title to the occupier, it is merely permission to occupy, without a great deal of security. In other words, the land owner can end the arrangement arbitrarily with just a reasonable amount of notice, usually specified in the licence agreement.

A tenancy is identified as having some specific characteristics: the tenant has exclusive possession, there is a rent to be paid and it is for a specific period of time, either period by period, a monthly periodic tenancy for example, or a term of years.

For a licence situation to exist in law there cannot be exclusive possession. The landlord must have free access to the land or property. For example, a hotel room, a hostel, a lodger arrangement, a grazing agreement, a fishing agreement or an access route over land agreement. They would all be licences, where the owner has free access most of the time. The licensee simply has permission to occupy or access at the forbearance of the owner.

A licence therefore grants the licensee the right to do something specific on the land, whether to stay for a week in the hotel, to lodge with the landlord, to graze his cattle, fish in a river, or use a route over the owner’s land for access to some other place.

A landlord cannot avoid its legal obligations

Tenants have a considerable amount of protection from their landlords under the property laws. With the latest proposals before the English Parliament, these protections are about to increase for English residential tenancies. Once a tenancy is granted, there’s no going back and there’s no way of avoiding those legal protections.

Parliament has changed the rules many many times over the years and precedents have been set by court interpretations such that property laws have now reached an advanced stage of complexity. Tenancy agreements / leases are usually very long documents attempting to anticipate every eventuality and situation that may occur, in order to give both parties a high degree of protection. But at the end of the day they statutory rules will win out.

In fact commercial tenancies have stronger tenant protections than has been the case for residential tenancies over the past 40 years, since the advent of the Assured Shorthold Tenancy. The Landlord and Tenant Act 1954 part 2 gives commercial tenants ongoing security of tenure, unless the tenancy is let “outside the Act”, with the express agreement of both parties.

Over the years landowners (landlords) have used many loopholes to try to bypass onerous tenant protections. But most of these loopholes have now been closed by changes in the law. One example of this is landlords using a licence agreement in an attempt to beat the system. It might be a clever rouse to get around the rules, but one that will never succeed if it comes to court.

Using a licence instead of a tenancy would be a convenient way for a landlord to sidestep the tenancy rules, to regain possession virtually at the “drop of a hat”, you wish! But heading up the agreement with the word LICENCE is not the answer. Judges see it as the “situation” that counts, not the paperwork. The principles stated above must be clearly present for a licence to exist, regardless of what the agreement says.

It is very difficult if not impossible to show that a normal tenancy is really a licence situation, even in a multi-occupied property where tenants have their own rooms, when the landlord does not live in the same property, by sharing facilities or provide additional services as would be the case in a hostel or hotel.

Street v Mountford

This famous test case for this is from 1985, when it went all the way to the House of Lords, then the highest court in the land: Street v Mountford [1985] House of Lords

Mr Street, using an agreement which stated that it was a “licence”, granted Mrs Mountford the right to occupy rooms in his property in Boscombe at a rent of £37.00 per week. The question for the court was whether the agreement was a licence a lease (tenancy). The terms of the agreement included that Mr Street could enter the rooms at any time to inspect, to read the meter, to carry out maintenance and install or replace furniture or for any other reasonable purpose.

No one other than Mrs Mountford could occupy or sleep in the room without permission. No children or pets were allowed. The licence could be terminated by 14 days written notice. The agreement also stated the that the licence did not and was not intended to give a tenancy and conferred no protection from the Rent Acts.

The decision, including Templeman’s famous fork and spade analogy, was that the agreement was in fact a lease:

“My Lords, there is no doubt 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.”

“Any express reservation to the landlord of limited rights to enter and view the state of the premises and to repair and maintain the premises only serves to emphasise the fact that the grantee is entitled to exclusive possession and is a tenant.

“In the present case it is conceded that Mrs. Mountford is entitled to exclusive possession and is not a lodger. Mr. Street provided neither attendance nor services [as would be the case in an hotel] and only reserved the limited rights of inspection and maintenance and the like set forth in clause 3 of the agreement. On the traditional view of the matter, Mrs.Mountford not being a lodger must be a tenant.”

“In the present case, the agreement professed an intention by both parties to create a licence and their belief that they had in fact created a licence. It was submitted on behalf of Mr. Street that the court cannot in these circumstances decide that the agreement created a tenancy without interfering with the freedom of contract enjoyed by both parties.

“My Lords, Mr. Street enjoyed freedom to offer Mrs. Mountford the right to occupy the rooms comprised in the agreement on such lawful terms as Mr. Street pleased. Mrs. Mountford enjoyed freedom to negotiate with Mr. Street to obtain different terms. Both parties enjoyed freedom to contract or not to contract and both parties exercised that freedom by contracting on the terms set forth in the written agreement and on no other terms.

“But the consequences in law of the agreement, once concluded, can only be determined by consideration of the effect of the agreement. If the agreement satisfied all the requirements of a tenancy, then the agreement produced a tenancy and the parties cannot alter the effect of the agreement by insisting that they only created a licence. The manufacture of a five pronged implement for manual digging results in a fork even if the manufacturer, unfamiliar with the English language, insists that he intended to make and has made a spade.”

So, English tenancy laws are at the stage where it is almost impossible to accept money from an occupier of land or real property without creating a lease situation.

Unless it is clearly a lease situation, a lodger with a live-in landlord for example, or a commercial concession in a retail store, then you can more or less guarantee it will be a lease, with all the tenant protections that go with it – to be protected by the law, a landlord must either live in the property, conduct business from it, or provide additional services.

In any case it’s a fine legal line to draw and you don’t want to have to go to court to get judgement on an arrangement with all the expense that entails, so always get good legal advice if you’re not sure.

Regulatory change

Before the First World War most people in Britain rented their homes, as well as farms and business premises. This situation changed over the course of the last century, until it reached the lowest point for residential lettings when only around 7% of the population rented their homes in the early 1990s.

Business lettings where changed with the advent of the Landlord and Tenant Act 1954 but have remained quite stable since. This cannot be said for housing legislation which has been strongly affected by politics and social mores.

Total security of tenure for residential tenants, plus rent controls in England and Wales exited under the Rent Acts, some of these regulated tenancies still exist. Consequently very low returns for landlords made letting residential property unpopular until the private rented sector was de-regulated with the introduction of the Assured Shorthold Tenancy (AST), by Margaret Thatcher’s government in the Housing Act 1988.

We are now in a period where it looks like the pendulum of the private rented sector (PRS) regulation in England is due to swing back again to offering more protection for residential tenants.

Now that the private rented sector houses nearly 20 per cent of households, new legislation is to be enacted based on proposals set out in the policy paper: A fairer private rented sector Watch this space!

As with all legal matters, you should seek professional advice before taking action or not.

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