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Commercial property blog: When is a lease not a lease?12th April 2014

The terms "lease" and "licence" are often used interchangeably The terms "lease" and "licence" are often used interchangeably and there is an oft-cited misconception (similar to the widespread belief that the UK recognises common-law marriage – we don't!) common among landlords, tenants and managing agents alike, that calling something a licence means that either party can end the occupation at any point.

The fact of the matter is that a variety of different legal rights can be created and this will depend both on what the legal documents say and, particularly where documents are unclear or unsupported by the facts, on the parties' intentions.

Lease - does what it says on the tin

  • An exclusive legal right to occupy specific premises for a fixed term which binds any third party that acquires the property (i.e. if the landlord sells or dies).
  • The landlord gives up any right to occupy the premises for the term of the lease and has no right to move/relocate the tenant until expiry of the lease term (subject to any earlier break rights as agreed between the parties).

Periodic tenancy – timing is everything

  • A lease without a fixed end date – so the lease term is assumed to be the same as the period by which rent is calculated (normally weekly, monthly, quarterly or yearly). A tenancy will be an annual periodic tenancy when the rent is calculated annually but payable quarterly.
  • A periodic tenancy can only be terminated at the end of a period on one full period's notice (or 6 month's notice for an annual periodic tenancy).
  • A periodic tenancy can be created by express written agreement but in practice often arises where a tenant occupies premises without written documentation (including after expiry of a lease which has been excluded from the statutory security of tenure provisions – see below) particularly where there are no serious negotiations for a new lease ongoing.

Tenancy at will – "should I stay or should I go now…"

  • A personal right (i.e. it cannot be assigned by the tenant and will not bind a third party who acquires the landlord's interest in the premises) to occupy premises.
  • Either landlord or tenant can terminate the tenancy at any point without notice.
  • A tenancy at will often arises when a landlord allows a tenant into premises pending agreement and completion of a formal lease. If lease negotiations falter and the tenant remains in occupation, paying rent, the occupation may turn into a periodic tenancy (where the parties' actions are inconsistent with an intention that the arrangement could be terminated at any point without notice).

Licence to occupy – you can be moved from pillar to post

  • A personal right for a party (technically a "licensee" rather than a "tenant") to occupy premises allocated by the landlord from time to time. The landlord can move the licensee around when it chooses (subject to giving notice if agreed). Prime examples are shop concessions and serviced offices.
  • A document which is called a licence but where both parties intend the occupier should be allowed to remain in the same premises and not moved will be a lease, not a licence (even where the landlord technically has the right in the "licence document" to move the licensee around)

Security of tenure

  • The Landlord and Tenant Act 1954 grants tenants statutory rights to "security of tenure" meaning that the tenant has the right to remain in the premises at the expiry of its lease and to renew its lease on similar terms (but at a market rent) which can only be refused if the landlord meets certain criteria. Granting unintended 1954 Act rights can be a costly cause of delay for landlords with other plans for their building.
  • Tenants will automatically have 1954 Act rights unless a lease is excluded from the 1954 Act before completion of the lease or exchange of the agreement for lease (if any). A periodic tenant will always enjoy 1954 Act rights if they have been in the premises for more than six months. Tenants at will and licensees do not have any protection under the 1954 Act (but a "licensee" will if their licence is actually a lease).

When documents are unclear or don't exist…

  • Uncertainty can cause cost and anxiety for landlords and tenants alike. In the recent case of Barclays Wealth Trustees (Jersey) Limited v Erimus Housing Limited, the tenant Erimus Housing Limited (believing they had a quarterly periodic tenancy) gave three months' notice before the period end date to bring their tenancy to an end.
  • In the original Court hearing it was decided that the arrangement was an annual period tenancy, meaning that six months' notice was required to be given, expiring on the day before the anniversary of the start date. This analysis meant that Erimus owed further rent of over £170,000 per annum plus rates, service charge and insurance for 13 months.
  • In the last couple of weeks, the Court of Appeal has overturned the original judgement and held that Erimus was actually a tenant at will because they were still (albeit very slowly) negotiating terms for a new lease. Erimus is, therefore, off the hook for the extra rent and their landlord has been left with a large void period. Both parties will no doubt have incurred significant legal bills which could have been avoided by signing up to a document that put in place the occupation rights that both parties intended should exist.

About the author 

Katherine Ekers, Solicitor with Forsters LLPKatherine Ekers qualified as a solicitor in 2011 and is a rising commercial property star at Forsters LLP

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