Companies will often grant or take premises on short term and/or informal occupational arrangements. Sometimes, these arrangements will be formally documented and sometimes they will not. In the current climate, landlords can find themselves under pressure to allow tenants into occupation before the terms of a new lease are agreed or find they have inherited a new occupier that an existing tenant has permitted to enter without their consent.
Care must be taken to ensure that the short term occupational arrangements are properly documented and take effect in the manner intended by the parties. The absence of a formal lease does not mean that the occupier cannot claim security of tenure.
In the sixth edition of our series of essential guides for the in-house lawyer, we will focus on key practical tips to ensure that short term occupational arrangements accurately reflect the intention of the parties, as well as minimising any future unwanted liabilities which may arise as a result of the occupation.
What is a lease?
A lease is the grant of a right to the exclusive possession of land for a definite period of time.
Exclusive possession is the key element. A tenant has exclusive possession if it can:
(a) exercise the rights of a land owner and;
(b) exclude both the landlord and third parties from the land (NOTE - if the landlord has reserved rights of entry, for example to carry out works, then this does not affect exclusive possession).
Possession is not the same as occupation. Possession is a matter of law. Occupation is a matter of fact. So, an undertenant may be in occupation of a property although the undertenant’s landlord (the tenant) will remain in possession by virtue of its ongoing interest in the property.
What is a licence?
In essence, a licence is simply permission for a licensee to do something on a licensor's property. The permission given to the licensee prevents the permitted act from being a trespass.
Unlike a lease, a licence is a personal right only and cannot be assigned or transferred.
What is a tenancy at will?
A tenancy at will may be express or implied and arises in any case in which a tenant occupies the land with the permission of the landlord on the terms that the tenancy may be terminated by either party at any time. Where a formal lease agreement is pending, but the landlord has allowed a tenant into occupation and is accepting rent payment, then the Courts have previously held that a tenancy at will has been created (see Javed v Mohammed Aquil ).
In practice it can be difficult to distinguish between a licence to occupy and a tenancy at will. Like a licence, a tenancy at will is a personal right.
Extreme care should be taken when drafting a tenancy at will. If the document is not accurately drafted, then it may be actually be classed as a periodic tenancy for which longer periods of notice would be required to terminate.
Periodic payment of rent will not make a tenancy a periodic tenancy of itself. However, the payment of rent will assist in determining the parties’ intentions.
A tenancy at will can be terminated by either party. The tenancy at will is terminable by the landlord demanding possession or the tenant giving up possession. However, where a landlord determines a tenancy at will immediately, the tenant will have a reasonable time to enter the property after the termination to remove its goods.
Where a new tenancy is granted, (for example, the parties enter into a longer fixed term lease), a tenancy at will automatically ends.
Does calling an agreement a licence make it a licence?
No. Even if an agreement is called a licence, it may in fact be a tenancy. In Street -v- Mountford  the House of Lords found that the Court should look at the substance as well as the form of an agreement in deciding whether an agreement is a licence or a tenancy. The parties cannot turn what is in reality a tenancy into a licence, simply by calling it a licence.
Where the Agreement has any of the following characteristics, it may indicate that though labelled a “licence” it is not a licence:
- It grants exclusive possession.
- It is for a fixed term.
- It reserves a rent.
Unfortunately for the in-house lawyer all of the above characteristics only indicate that the Agreement may not be a licence and in reality a fixed term or a licence fee will not necessarily prevent the arrangement from being regarded as a licence.
Why is it important to know the difference between a lease, a licence and a tenancy at will?
If a landlord wants to ensure that it can regain vacant possession of a property at a particular point in the near future, then it is important to ensure that no security of tenure is afforded to the tenant. Similarly, if there isn’t time to negotiate all the terms of a formal lease before allowing a tenant into occupation, then the landlord may want to ensure that it can recover possession if negotiations for the formal lease fall through.
A true licence and a true tenancy at will do not benefit from security of tenure under Part II of the Landlord & Tenant Act 1954 (“the Act”). In addition, the Act does not apply to a tenancy which is for less than 6 months.
Clauses in an agreement which may indicate a licence
The following examples are not conclusive but provide an indication of how the Courts have interpreted agreements in the past.
- A clause providing that the occupier should not interfere with the owners’ right to possession and control of the premises. This clause has been found to be inconsistent with the grant of exclusive possession in Shell Mex and BP -v- Manchester Garages  and National Car Parks Limited -v- Trinity Development Co (Banbury) Limited .
- A clause entitling the owner to require the occupier to transfer his occupation to other accommodation elected by the owner inDresden Estates -v- Collinson . This clause was held not to grant exclusive possession.
- A provision prohibiting the use of a property for a period in each day or granting a right to use a property for only part of each day. This has been held to be an indication that exclusive possession has not been granted. Consequently care should be taken where, despite the restriction on hours of access, the reality is that the tenant does actually have exclusive occupation see Graysim Holdings Limited -v- P & O Property Holdings Limited .
Clauses in an agreement which may indicate a lease
- Where a landlord reserves specific rights of entry to view or repair, it is a strong indication of the grant of exclusive possession and therefore a tenancy.
- A covenant for quiet enjoyment and a forfeiture clause pointed towards a tenancy in the Courts opinion in Addiscombe Garden Estates Limited -v- Crabbe .
- In the case of Facchini -v- Bryson  a clause prohibiting assignment or underletting indicated exclusive possession and a tenancy.
- In Street -v- Mountford, the House of Lords held that if a document granted a fixed or periodic term at a rent, it pointed to a tenancy rather than a licence.
Which agreements are binding on successors in title and third parties?
A lease or tenancy binds a purchaser of the reversion because a lease is a legal interest in land.
The situation is a little more complicated in the case of a licence, which is only a personal interest and does not create an interest in land. A licence, in the true legal sense of the word, will not be an overriding interest as they confer purely personal rights and not property rights. The precise position is unclear, but the general view is that a contractual licence is a personal interest only and is therefore only enforceable against the licensor.
What are the advantages and disadvantages of each arrangement?
Whether something is an advantage or a disadvantage often depends upon whether you are landlord or tenant, but generally speaking the below should serve as a general guide:
A lease confers a secure period of income for the landlord.
Flexibility for both parties can be introduced into the lease by the insertion of a mutual rolling break clause.
A lease of a security and certainty for the tenant is not the power of land. The landlord generally has limited rights of access.
SDLT may be payable.
An occupier generally does not have the same degree of control over the land as it would have if it were granted a lease. A licence is a personal privilege.
Tenancy at Will
Tenancies at will can be determined instantly and this may not offer enough security and certainty for an occupier of land.