Tue 08 Sep 2015

When is a licence a lease?

Question - When is a licence not a licence?  Answer - When it's a lease.

Okay, maybe that's not in the running for the best joke in the Edinburgh Fringe but  the question does highlight the difficulty in distinguishing a Scottish licence from a lease. Indeed, in Scotland, there is still some debate about whether or not it is even possible to create a licence to occupy.  Regardless of this uncertainty, licences to occupy are used from time to time for commercial and residential property and are used on a regular basis in my line of practice with the telecommunications industry.

Does it matter?

If you set out with the intention of creating a licence but end up with a lease, does it matter? Well yes it does.

One key consequence of the creation of a lease, is that a lease gives the tenant a real right in the property let, i.e. a right that is not just enforceable against the person who granted it but is also enforceable against successor owners of the property.  A licence, in contrast, is normally used where the parties are looking for a short term arrangement with more flexibility. Generally a licence will grant only a personal right to the licensee - there will be no transfer of any interest in the property or land - and that right will not be enforceable against successor owners.

Another important difference is in the treatment at termination. If there is a lease, then it automatically runs on for one year after the intended expiry date by the operation of a legal rule called "tacit relocation" - unless either the landlord or the tenant  has served an appropriate notice a certain period before the end of the lease. No such notice is required to ensure that a licence ends; it  will simply terminate on the specified end date.

How to create a licence

If the intention is to create a licence to occupy rather than a lease, then a few fundamental rules must be followed. Those are:

  • set out clearly in the document that the intention of the parties is that it is a licence and not a lease - and use the correct terminology, i.e. licensor (not landlord) and licensee (not tenant);
  • ensure that the licensee is not being granted exclusive possession of any part of the property - the easiest way to do this being to allow the licensor to move the licensee around within its property and/or to have the licensee accept that others can also use the relevant property in some way;
  • be clear that the licensor retains substantial possession rights; 
  • avoid any rights to assign - the licence should be personal to the licensee; and
  • make sure that the subsequent actings match the terms of the licence, e.g. if you are the licensor, always refer to the arrangement as a licence and ensure that exclusive possession is never ceded to the licensee.

I should also say that if the arrangement is not one for which any payment is to be made, e.g. a licence to go on site to carry out a survey, then this can never be a lease - as one of the fundamental requirements for a lease is that there is some rent.

Awareness is important

A licence to occupy can be a useful tool where the parties are seeking a relatively informal arrangement for a short term without the burden of more onerous lease conditions. 

However, there must be careful consideration when drafting to avoid the arrangement actually being a lease. It is not enough simply to call the document "a Licence". I am often asked to give advice in relation to termination of a licence, only to discover that what I am looking at is in fact a lease. 

Landowners in particular should beware before offering to sign up to a licence. The last thing you want is to discover that your licensee has security of tenure when all you wanted was a short term arrangement. 

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