Morgan Russell Solicitors

Tenant or Licensee? - Understanding the Difference

Does is matter?

Yes - Tenants have significant rights compared with occupiers of premises whose occupation is by virtue of a licence. It is therefore important to be sure of the basis of your occupation.

The Basics – What is a lease and what is a licence?

A lease is the grant of a right to the exclusive possession of land for a finite period of time, which is either certain or can be ascertained. A lease is both a contract and an interest in land i.e. it is capable of existing separately from the contract once the term has ended.

One key feature of a lease is exclusive possession. A person has exclusive possession if it can exercise the rights of the landowner, free from any rights of either the landlord and third parties from the land (except to the extent that the landlord has reserved rights of entry, for example to carry out works). Other indicators of a lease are a fixed or periodic term, and reservation of a rent.

A tenant may have exclusive possession, even where it is not in occupation. For example, a tenant may have exclusive possession under a lease, but may not be in occupation where it has granted an underlease to an undertenant.

A licence is a permission for one party (the ‘licensee’) to do something on another party’s (the ‘licensor's’) property. Effectively, a licence will stop the licensee from trespassing on the licensor’s property. Unlike a lease, a licence does not create a separate interest in land and a licensee does not have exclusive possession of the property.  A licence is also not a licence if it reserves a rent or is for a fixed term.

It is important to note that simply labelling a document as a lease or a licence is not determinative. A lease may come into being if exclusive possession is granted, even if the arrangement is labelled as a licence. 

Does the lease need to be in writing in order for me to be a tenant?

No – Although the general rule is that a lease must be made as a deed and be in writing, there is an exception if certain requirements are met, namely where:

  1. The lease ‘takes effect in possession’ i.e. there is either physical occupation or receipt of rents and profits (from an undertenant, for example).
  1. The lease is granted for a term of three years or less from the date it is granted.
  1. The lease is granted at the best rent reasonably obtainable without taking a fine or premium.

This means that the following types of lease do not have to be created by deed to take effect at law. They may also be oral, although for evidential reasons, it is clearly better that they are in writing:

  1. Short fixed term leases (up to three years).
  1. Periodic tenancies (i.e. running by reference to a period of time, and determinable on either party giving the same time period as its period of notice)
  1. Tenancies at will (i.e. a tenancy which may be determined by either party at any time)

Rights under the Landlord and Tenant Act 1954

Under the Landlord and Tenant Act 1954 a tenant occupying property at the end of the lease term for business purposes has a statutory right to renew its tenancy at the end of the term, subject to certain exceptions.  The landlord can only oppose renewal on certain limited grounds. Licences and tenancies at will which are properly drawn up, do not confer this right.

By way of example, in one Court of Appeal case, the occupiers of the property claimed they had a lease. They had a one page document, which was not properly executed as a lease and they paid rent of approximately one third of the market rate.

When a new purchaser of the freehold of the building sought to evict them, the occupiers argued that as a result of them having a lease, they had ‘security of tenure’ under the Landlord and Tenant Act 1954 i.e. they were legally entitled to remain in occupation and had a right to renew their lease.

The Court of Appeal held that the occupiers did not have a lease because the rent was not equivalent to the market rent. Therefore, the arrangement could be terminated on demand. If the conditions for a lease as set out above had been met, the Court may well have ruled that the occupiers did have a lease and security of tenure. Consequently, the landlord may have found himself unintentionally with a tenant, making a sale of the property more difficult.

Action to take

If premises are occupied on an informal basis, it makes sense to clarify whether you are occupying as a tenant or licensee, and to put the necessary formalities and documentation in place. Whether you are an occupier or owner, you do not want to find yourself in a position you did not intend to be in.

Further information

If you require further information or assistance, please contact Debbie Turner of Morgan Russell on 01372 461411.

The data contained within this document is for general information only. No responsibility can be accepted for inaccuracies. Readers are also advised that the law and practice may change from time to time. This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.
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