When an owner of commercial business premises agrees to grant permission for those premises to be occupied by a third party, it is important to consider whether the occupation should be on the basis of a lease, a licence or a tenancy at will, as each option has its own advantages and disadvantages. Firstly, we briefly summarise what we mean by a lease, a licence and a tenancy at will as follows:
A lease is, essentially, a contract between a landlord (i.e. the landowner) and a tenant (i.e. the occupier) granting the tenant the exclusive occupation of premises for a determinable period of time.
Under the provisions of the Landlord and Tenant Act 1954 (LLTA 1954), the standard position is that the lease will have the benefit of what is known as ‘security of tenure’. This means that at the end of the term of the lease, the tenant has the automatic right to renew their lease on the same terms (subject to the lease being updated), and the landlord has limited ground on which the tenant’s request for a new lease can be refused. It is possible for a landlord to grant a lease so that a tenant does not have the benefit of security of tenure, and this is achieved by a process known as ‘contracting out’.
A lease is both a contract and an interest in land, meaning the tenant can pass a lease onto another person (known as assignment). It also binds the landlord’s property so that, should the landlord sell its premises, assuming the lease is still in existence, a buyer would buy the property subject to the lease.
A licence is a consent from a landowner’s to a third party to occupy and/or do something on their land. The landowner in this context is known as a licensor and the person to whom the licence is granted, a licensee. A licence could be, for example, a retailer having a concession in department store (e.g. a licence to occupy).
A licence does not give the licensee an interest in the licensor’s land and is a personal right. There is no exclusive possession as with a lease. It therefore cannot be passed onto another person and, where the licensor sells their property, the licence will end.
However, calling a document a licence does not necessarily mean it is a licence. In certain circumstances, a licence could be determined to be a lease, particularly where exclusive possession of premises is given to the licensee. If a document is to be a licence, therefore, its terms and wording should be carefully considered.
Tenancy at Will
This exists where an occupier occupies premises on terms which either the owner of the premises or the occupier themselves may end at any time. A tenancy at will may be express or implied and can appear very similar to a licence to occupy in practice.
Again, as with a licence, the occupier does not gain an interest in the property to which the tenancy at will has been granted and therefore it cannot be assigned. It is a personal relationship between landlord and tenant.
What are the advantages and disadvantages of each option?
The advantages and disadvantages of leases are as follows:
- For a landlord, it has the option of ‘contracting out’ the lease from of the security of tenure provisions of the LLTA 1954, and if done correctly, on expiry of the lease term the landlord is entitled to possession of the premises and the tenant will not be automatically entitled to remain in occupation. This gives a landlord flexibility to deal with its premises as it wishes without the need to defend a claim by a tenant in relation to its right to a new lease or the right to remain in occupation.
- It gives the landlord a secure period of rental income from its premises.
- A lease gives a tenant certainty and security as occupier of the premises for the lease term and, if the lease has the benefit of security of tenure, the tenant will have the right to remain in occupation of the premises and request a new lease from the landlord. The landlord will also have limited rights of access to the premises for the duration of the lease.
- A lease could introduce flexibility for both the landlord and the tenant by having a break clause allowing one or both parties to end the lease early. This could be a fixed date or dates during the term or be a rolling break clause for the duration of the lease term.
- A potential disadvantage for a landlord and a tenant is that a lease is usually a fairly long document which can potentially take some time to negotiate and therefore may incur higher costs for the parties than a licence or tenancy at will.
- Depending on the rent payable under the lease, the tenant may be required to pay Stamp Duty Land Tax on completion of the lease.
The advantages and disadvantages of a licence are as follows:
- A licence tends to be a much shorter document than a lease and therefore should be able to be completed more quickly and therefore reduce the parties costs in connection with its negotiation and completion.
- A licensee is entitled to occupy the premises on the basis of the terms of the licence and, if the document provides that the licensor should give the licensee notice to end the occupation, the licensee is entitled to be given the requisite notice period. Therefore, how the licensor or licensee can end the licence will depend entirely on the terms set out in the document.
- A licensor cannot end a contractual licence in breach of contract. If a licensor wishes to bring proceedings against the licensee for possession, it must wait until the licence has expired before doing so.
- Assuming a licence to occupy has been properly drafted, then it would be outside the scope of the security of tenure provisions of the LLTA 1954.
- On completion of a licence, no Stamp Duty Land Tax would be payable by the licensee.
- If the licence grants the licensee exclusive occupation of the premises and they occupy these for a period of more than six months or on an ongoing basis, there is the risk that the occupier could challenge the arrangement and claim that the licence is in fact and lease. If the licensee were successful in this challenge, the licence may therefore be determined to be a lease which has the benefit of security of tenure under the LLTA 1954.
- A licensee’s occupation is much more precarious than if they occupy under a lease; and gives them no security. If the licensor sells the premises, the licence will end, although there may be a right to claim the original licensor was in breach of contract in these circumstances.
- A licence does not grant any interest in the property and is a personal right given to the licensee. A licensee therefore does not have the same degree of control over the premises as it would havee under the terms of a lease.
The advantages and disadvantages of a tenancy at will are as follows:
- As with a licence, a tenancy at will is a short document which should be able to be negotiated and completed fairly quickly and more cheaply than a lease. If properly prepared, it should also be outside of the security of tenure provisions of the LLTA 1954.
- The essence of a tenancy at will is that it may be ended instantly by the landlord or the occupier, and this therefore favours the landlord in retrieving possession of the premises from the occupier.
- There would be no Stamp Duty Land Tax payable on completion of the tenancy at will.
- This type of arrangement gives very little security and certainty for the occupier of the premises because it may be ended by the landlord instantly. However, because the occupier may also end the arrangement instantly, this does not give the landlord a secure period of rental income on which it can rely.
- As with a licence, the preparation of the tenancy at will document is very important as, if not drawn up correctly, it could easily be argued by the occupier to be a periodic tenancy, which could have the benefit of security of tenure.
If you have business premises which you are looking to rent and would like advice and assistance with the preparation of the appropriate documentation, please contact our Commercial Property Department on 0118 958 9711 or [email protected] where a team of specialists will be happy to help, or visit our Commercial Property and Conveyancing page for more information.