The distinction between a lease and a license

3rd February 2020

Thousands of tourists visit Cornwall and the South West each year, thanks in part to the region’s reputation for wonderful food and drink. Renowned for its Cornish cream tea, hearty pasties, fresh fish and locally reared meat; the region has something to offer for everyone.

Cornwall is home to a great many restaurants, eateries, bars and bistros. With such a diverse offering, it is important that any business that either owns or occupies commercial property understand the legal basis under which it is occupied. Two of the most common methods for a business to occupy commercial property is through either a lease or a licence, with the distinction between the two being very important.

What is a lease?
Technically, a lease is the grant of a right to the “exclusive possession” of land for a determinable period of time. According to case law if an agreement grants exclusive possession for a fixed term at a rent, then this indicates that the agreement is a lease rather than a licence.

So what is exclusive possession? A person has exclusive possession if they can exercise the rights of the landowner and exclude both the landlord and third parties from the property. Exclusive possession is not prevented by any rights that the landlord may have under the lease to enter the property, such as to inspect it or carry out works.

A lease can be bought and sold, and is a property interest in its own right which survives eg a sale of the freehold. The tenant has the security of knowing that (if they behave) they will be left in “quiet enjoyment” of their property for the length of the lease term.
Importantly, a tenant under a lease may also benefit from statutory protections under the Landlord and Tenant Act 1954 (the “Act”). The Act gives security of tenure to certain tenants who occupy premises under a lease for the purpose of their business. If the Act applies the tenant can stay in occupation of the property at the end of the contractual term of their lease; and the lease will continue on the same terms as before until it is ended in one of the ways specified by the Act.

What is a licence?
A lease and a licence are similar in some respects. Both allow the use of somebody else’s property. A licence however, is a personal right for the occupying licensee to do something on the licensor’s property that would otherwise be a trespass. A licence does not create a property interest and as such offers no security to the occupier, e.g. it will not survive a sale of the freehold and indeed may be revoked by the licensor at any time (or in accordance with its terms). An example of where a licence may be used could be where only part of a commercial property is occupied, or occupation is only allowed for a short period of time, perhaps for a season.

Why this matters
So, why does this matter? This matters because a misunderstanding of the legal nature of any occupation of commercial property can have serious implications. For instance;
• The owner of a restaurant may licence somebody else to operate from their property. The owner may want to recover possession of their property and believe that they can do so quickly as per the terms of their ‘licence’. However, if it is found that the licence in effect grants exclusive possession to the tenant and is actually a lease that benefits from the statutory protections of the Act, it will be much more difficult for the landlord to regain possession of their property. The landlord may wish that they had granted a lease instead; and that the parties had “contracted out” the lease from the statutory protections of the Act.
Contracting out of the statutory protections of the Act has to be done before the lease is entered into; and basically means that the tenant is not offered the protections of the Act that would otherwise allow them to stay in occupation at the end of their contractual term.
• From an occupier’s perspective, one of a business’s most valuable assets can be its goodwill, which may be attached to its property and location. It would be very disruptive and damaging to the business if the occupier had to leave the property unexpectedly. An occupier offered a licence should consider the precarious nature of a licence, which is usually easily ended by the licensor; with such termination often at extremely short notice.

How to distinguish between a lease/licence
There are many reasons why a licence may be used instead of a lease, for example a licence is an attractive option where an occupier is seeking a short term arrangement. However, a licence should not be used to avoid the security of tenure provisions of the Act. A court will look beyond what the arrangement is called and will look at the substance of the agreement. Parties cannot turn what is in reality a lease, into a licence, by calling it a licence.

As explained, one of the key elements of a lease is exclusive possession.
– Does the occupier have a key to a defined area of property that it alone occupies?
– Would other parties, including the owner, need to check with the occupier to gain access to the property?
– If the answer to these questions is “no”, the occupier may only have a personal right to occupy (a licence). If the answer is “yes”, then the occupier may well have a lease; and may indeed have rights under the Act

Pros and Cons – Lease or Licence?
• A lease offers both parties a period of security and certainty.
• A lease may grant a tenant security of tenure, which the landlord may be happy with.
• If the landlord wants to avoid business security of tenure, the contracting out procedure (only available in the case of a lease) gives certainty to both parties from the outset.
• A licence can be relatively quick and informal. The fact that a licence is easily terminated may be attractive to both parties, or may be considered too precarious by the licensee.
• For an owner the biggest drawback of a licence would be the risk of inadvertently granting exclusive possession and the “licensee” then claiming that they are a tenant with security of tenure.

Get in touch
This is a complicated area of commercial property law. If you are considering entering into a lease or a licence, or would like further information on the areas discussed in this article please get in touch. Murrell Associates have an experienced, commercial and friendly team of commercial property lawyers. We take the time to fully understand our clients’ needs and pride ourselves on our expertise and levels of client service. The team can be contacted on 01872 226990 or by email at info@murrellassociates.co.uk