Licences, leaseholds and tenancies at will

Where a property owner grants permission for another person to legally occupy the property, they need to decide whether to do this via a tenancy at will, a lease or a licence. All three have different advantages and disadvantages. A licence simply allows a person to do something on someone’s land and prevents them from being classified as a trespasser. It is a personal right or permission and does not offer the holder any security.

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What is the difference between a lease, a licence or a tenancy at will?

All of these options allow a person to occupy a property that they do not own, but there are quite significant differences between the three.

Licence

Licences are highly flexible arrangements that are generally only used for commercial relationships. They can be for a fixed term or can be ongoing. A licence simply grants a person permission to use the land for a particular purpose, such as occupying it, and can be fairly risky since they offer no protection for the licensee. The owner of the property is the licensor and the person who has been granted use of the property is the licensee.

A licence does not grant the licensee with exclusive use of the property, it cannot be assigned and it does not pass to a new owner if the property is sold. This is why the wording of the arrangement is so important to make sure that it actually is what you want it to be. Simply calling an arrangement a licence does not automatically mean it will qualify as one and what is important is the actual substance of the arrangement as well as the specific characteristics, for example:

• Is it a fixed term arrangement?
• Does the arrangement allow exclusive possession?
• What are the rent provisions?

Lease

A lease (as opposed to freehold occupation) is a contract between the owner of the property and the tenant that grants them exclusive use of the premises for a set period of time. A lease is therefore a legal title over the land, albeit with a limited remit. A lease grants a “security of tenure”, which means at the end of the lease the tenant can automatically renew the lease on the same terms and the owner of the property only has limited grounds to be able to refuse the tenant’s request to renew. A tenant is able to assign the lease to a third party since it creates an interest in the land. Where the owner sells the property, then the new owner will also acquire any valid leases.

Tenancy at will

A tenancy at will is short term arrangement that is very flexible and occurs where the landlord gives a tenant consent to occupy a property indefinitely but with the understanding that either party can give notice and immediately end the arrangement. A tenancy at will is often used during negotiations in relation to a lease to allow the tenant to start their occupation of the property before the details of the lease are finalised. This arrangement can only be used for commercial tenancies.

A tenancy at will can be either express or implied and formal or informal. They can appear very similar to a licence since it also creates a personal right and cannot be assigned to anyone else. However, there are crucial differences- a person will have been granted a tenancy at will where they have exclusive possession and control and can exclude all others, including the owner of the property. However, the arrangement will be a licence regardless of what it is called in the agreement if:

• The owner can exercise control over the property (for example providing management services or being able to occupy the property)
• The arrangement is not for exclusive use and the person that has been granted possession cannot exclude others

Advantages and disadvantages of licences

Each of the above situations has its own advantages and disadvantages. For licences these are as follows:

• It is likely to be easier to negotiate and draft a licence since it is a shorter document
• The licensee can have some protection in relation to the ending of the licence if this is set out in the terms of the licence itself
• Stamp Duty Land Tax does not need to be paid by the licensee when the licence ends
• Licences are also exempt from Land Transaction Tax
• The licensee does not have any protection from the land being sold, ending the licence, other than a possible claim for breach of contract
• A licensee does not have very much control over the property and does not have security of tenure

ADVANTAGES AND DISADVANTAGES OF LEASES

Each of the above situations has its own advantages and disadvantages. For licences these are as follows:

• A lease grants the leaseholder exclusive possession for a set period of time
• Security of tenure means that the leaseholder the right to extend the lease on the same terms
• It is generally a quicker way to acquire premises, requiring less up front funds, as compared to buying property outright
• Rent review clauses can result in price increases
• Premises cannot be altered under a lease to suit the leaseholder’s needs
• The rent paid does not result in any acquisition of assets at the end of the lease
• When the lease ends, the leaseholder has to return it to its original state, an exercise that can be expensive
• Leaseholders that assign their lease will need to guarantee that the person taking over the rent will pay