Lease or License?
Article by Gurmail Sidhu, Senior Solicitor at Douglas Wemyss Solicitors .
As a solicitor, clients often ask me this question - particularly in relation to commercial property. The reply depends because both leases and licences have advantages and disadvantages for both parties involved.
Although the differences are sometimes very subtle and blurred, it is important to distinguish between the two relationships created by the use of these documents. It is very difficult to create a document and be absolutely certain that the relationship created is that of a Landlord and Tenant or of a Licensor and Licensee. It is easier to create with certainty a Landlord/Tenant relationship than that of a Licensor/Licensee. There is significant case law which turns on situations where the parties believe they have created a relationship of Licensor/Licensee and then there is a claim that in reality the relationship created is that of Landlord/Tenant – a relationship that gives rise to very different rights and obligations.
In creating an agreement, it is not sufficient for the document to be called a Lease or Licence and to believe that is the relationship. The courts are not interested in what it is called. What they are interested in is what in fact is created; this is done by taking into account all of the circumstances, the rights and obligations which are agreed between the parties and what their intentions were.
In creating a Lease or License, the main difference in effect is that a Lease creates an interest in the property whereas a Licence
creates rights which are exercisable over the property
The reason for determining one or the other is primarily that if the Agreement is construed as a Lease then the provisions of the Landlord and Tenant Act 1954 Part II will apply. These provide security of tenure for the Tenant and make provision for compensation if the Landlord does not agree to the renewal of the lease at the end of the initial term and for the rent that the Landlord can demand on renewal. With a Lease, the existing term can only be brought to an end by the using the procedures and provisions contained within the Act. The Tenant has a statutory right to a new lease. Also, the grounds on which a Landlord can refuse a new lease are limited to specific circumstances.
Where the agreement is deemed to be a License, it will terminate either on the date specified or agreed between the parties, or in the absence of agreement by one party giving the other reasonable notice.
Some of the main factors which indicate a Lease as opposed to a Licence include:
- Exclusive possession (a specific area)
Because this area of law can be confusing and muddled, it is advisable before entering into lease or licence agreements, you should obtain legal advice from a solicitor.