What is the difference: Lease, Licence or Tenancy-at-Will?

Owners (landlords) of commercial (business) premises and sometimes residential premises want to let to a tenant on a short term basis, but are fearful of creating a long-term arrangement such that the tenant cannot be removed if the landlord wants it.

Basically, there are three ways to do that which comply with the law and protect the landlords interests: a lease, a licence or a tenancy-at-will.

A lease

A lease grants the occupier an interest in land – a legal title, albeit a time limited one. A lease gives the lessee the right to exclude all others, including the land.

A licence on the other hand is merely a right to occupy does not give a tenant the right to exclude the landlord, indeed the landlord should ensure that this is never the case, otherwise a tenancy could be created by default.

By having a lease the tenant has been granted exclusive possession of the land (property) under the terms of that lease and is able to exercise the rights of an owner of that land. In other words the tenant is for all practical purposes the “owner” of the premises for the term of the lease. And in that respect is responsible for everything connected with the premises as if he were the owner: safety, liabilities and fines, insuring, internal repairs, and in the case of a full repairing and insuring lease, what the Americans call a “triple net lease”, for all repairs as well.

A license

Licenses offer both landlord and tenant a high degree of flexibility. For example, a licence can be highly beneficial to start-up businesses as they don’t commit the tenant to a long-term lease when their future requirements in terms of activity levels and space requirements are uncertain. Licenses are the effective solution for both parties in this situation with serviced workshops and offices. They are seldom used for residential lettings apart from when the landlord lives with the tenant (lodger).

The crucial distinction between the two – license or tenancy – is the terms “exclusive possession” and “control”. So, where a tenant can exclude all others, including the landlord, he has a tenancy, regardless of what the landlord may title his agreement.

On the other hand, generally, where the landlord can exercise control (usually living on or occupying the same premises, or providing management or cleaning services) and where the tenant cannot exclude all others (lodgers and serviced office occupiers share facilities) then a license situation exists, even if the agreement says it’s a tenancy.

In the famous 1985 case (Street v Mountford) the House of Lords held that it is a matter of fact (the situation) that counts, not form (the wording) of the agreement.

So, a landlord granting exclusive possession of premises, or a part thereof (land in legal terms), for a fixed term, will create a tenancy, regardless of what title the parties attach to the agreement.

In the case of residential occupation there’s a peculiar “grey” area of the law sitting somewhere between the lease and the license. This is the situation where a landlord lives in the building but where the occupiers (landlord and tenant) do not share facilities.

This is known as an “occupier with basic protection”, someone who does not have the full rights and protection that a tenant would have under the Housing Acts. This situation is somewhat akin to a commercial tenancy (common law tenancy) which is purely contractual and not affected by the statutory rules under the Housing Acts. Nevertheless, having served a notice to quit, to be certain of being fully lawful when seeking challenged possession, the landlord should apply through the courts for a possession order.

In the case of a commercial tenancy, the landlord has always had the traditional remedy of forfeiture, where a tenant is in breach of contract. This is so whether lease or license, but great care should be used in applying this remedy which effectively means locking the tenant out – seek legal advice in every case.

The advantages of a licence for a landlord and tenant are that licences cover a relatively short period of time, usually up to six months, whereas leases usually run for some or many years and can have onerous conditions. Most licences give both the landlord and tenant the right to terminate the agreement when required with a typical notice period being one tenancy term (rent period) or 28 days.

The license agreement is straightforward and does not need a solicitor to prepare each time, as is the case with a complex lease, and is therefore inexpensive to set up. Basically both parties sign a standard agreement. The landlord has the right to enter the licenses premises at any time and the tenant has no right to renew the licence once it has expired.

A Tenancy-at-Will

A tenancy or license at will is a short, flexible tenancy or license and in most respects is more like a licence than a tenancy. A tenancy-at-will is from the outset intended to be short and can be terminated at any time by either party. A tenancy-a-will is often used as an interim tenancy allowing the parties to negotiate the terms of a longer lease and must not be prolonged.

A tenancy-at-will is used exclusively for commercial (business) tenancies. They need careful attention to the legal drafting so as not to create a periodic tenancy thereby conferring security of tenure on the occupier. Generally, a tenant given the right to occupy commercial premises for a business purpose acquires a statutory right (under the Landlord and Tenant Act 1954) to renew the tenancy virtually indefinitely, subject to the landlord having the right to oppose renewal very certain limited grounds.

I each case, a lease, license or tenancy-at-will, it is very important to have a properly drafted agreement to fully protect the rights of both parties without any ambiguity. A landlord may want to avoid an indefinite commitment to a tenant, and likewise a tenant may not want to be trapped in a long-term lease agreement.

The importance of correctly drafting a tenancy-at-will agreement cannot be overstated. If it is incorrectly drafted or if it runs for too long it may result in the creation of a periodic tenancy. This was the case in Javad v Aquil [1991]. The main factors which determined this were: (1) the length of rent-paying occupation, and (2) lack of insistence by the landlord on writing a formal lease.

Leases are subject to Stamp Duty Land Tax whereas license and a tenancy-at-will are not.

Leases – letting outside the Landlord and Tenant Act

A commercial tenancy for business use comes under the Landlord & Tenant Act 1954 Part 2. This gives statutory security of tenure for the business tenant and a right to renew, even if the landlord opposes this. As a business tenancy can be created by default, without a written agreement, purely by the action of the parties, e.g. taking rent over an extended period, great care is needed.

In order to exclude a tenancy from the requirements of the Landlord & Tenant Act 1954 Part 2 the landlord can serve a special warning notice on the tenant, allowing him or her at least 14 days’ notice that this will be the case, before signing the lease.

This notice must be substantially in the form given in The Landlord and Tenant Act 1954, Part 2 (Notices) Regulations 2004* which informs the tenant that the landlord is offering a lease without security of tenure. It explains the rights which the tenant will be giving up if it agrees to a lease on those terms. It also suggests that the tenant should take professional advice before making a decision.

As with all notices it is very important to make sure that the notice is validly served, that proof of service is obtained and that the signed notice is kept safe with the signed counterpart lease.

In addition the notice must be acknowledged in writing by the tenant by way of a signed declaration and the lease must include provisions which exclude sections 24 and 28 of the LTA Landlord and Tenant Act, with reference to the notice and declaration.

Security of Tenure – short Business Tenancies under the 1954 Act

Part II of the Landlord & Tenant Act 1954 applies to any tenancy where the property “is or includes premises which are occupied by the tenant and are so occupied for the purposes of a business carried on by him or for those and other purposes”.

There are some exceptions to this including mining leases and agricultural premises. The Act does not protect leases of under 6 months, which have no provisions for renewal.

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