Image of unsigned lease agreement with pen

29/09/2019

It is not unusual for people who are embarking on commercial property transactions to begin negotiating heads of terms before seeking legal advice and without knowing the difference between a lease, licence and tenancy at will.

Before agreeing heads of terms in relation to any proposed property transaction, I would strongly suggest first discussing your proposals with a solicitor to seek initial advice and guidance.

The distinction between a lease, licence and tenancy at will is important to understand before agreeing terms with the other party, either directly or through an intermediary.

The basic differences are as follows:

Lease

A lease grants rights of exclusive possession (quiet enjoyment) for a fixed period in consideration for a rent.

Full repairing and insuring leases are common, known as ‘FRI’ leases. This is a lease where the costs of all repairs, rates, taxes, outgoings and insurance are borne by the tenant, notwithstanding that the landlord will usually take out the insurance itself and recover the costs from the tenant.

Unless expressly excluded (before the lease is completed) a business tenant would benefit from a statutory right to continue to occupy the premises after the tenancy has come to an end (on similar terms) by virtue of Part II of the Landlord and Tenant Act 1954, known as ‘security of tenure’.

Licence

A licence is a personal, non-exclusive permission to occupy the licensor’s property (or part only of the licensor’s property) subject to the licensor’s and/or any other third parties’ rights of occupation.

This type of arrangement does not create an estate in land.

It is important to note that should a licensor sell the property (even to a group company) any licence to occupy will end and a licensee would not have rights to continue to occupy as licensee. They may though have a right of action against the original licensor for breach of contract.

This type of arrangement is precarious for a licensee, as it does not offer any security.

Tenancy at will

A tenancy at will is often granted in the form of a letter and, like a licence, it does not create an estate in land.
A daily fee is usually charged for the benefit of non-exclusive occupation. The cost of outgoings and rates are typically included within the daily rate charged by the landowner.

This type of agreement can be terminated by either party at any time without notice, so it’s often used only as a short-term measure, to allow a period for a party to remove items from a property following expiry of an old lease, or to allow early occupation while a new lease is being negotiated.

It is unusual for a tenancy at will to be granted as a stand-alone agreement. In such circumstances, a lease or licence should be considered.

Both a licence and a tenancy at will (if properly drafted) do not confer security of tenure to an occupant.

Security of tenure does not apply to a tenancy at will, but it does apply to a periodic tenancy so care must be taken to ensure that amendments are not agreed which could result in the tenancy being construed as a periodic or fixed term tenancy, for example, the incorporation of an obligation on the part of the landlord not to terminate except on a specified length of notice.

A licence must be carefully drafted, as poor drafting could result in a licence inadvertently being deemed as a lease with the benefit of rights of security of tenure.

For advice on leases, licences, tenancy at will or negotiating heads of terms, call 01782 205000 or email simon.abbotts@beswicks.com