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We often get enquiries from property owners who are trying to decide how to document the short-term occupation of their business premises.
In this blog, we consider the advantages and disadvantages of using a lease, licence, and tenancy at will for the occupation of commercial property on a short-term basis.
Lease
A lease is an agreement that grants exclusive possession of the premises to the tenant for a fixed period and is an estate in land.
Even if the parties have intended to grant a licence or tenancy at will and have labelled the document as such, a lease may still be created if the tenant has exclusive possession of the premises.
Exclusive possession means possession of the premises to the exclusion of all others, including the landlord (although the lease will usually reserve rights of entry for the landlord to inspect and repair the premises where necessary).
The advantages of a lease for a property owner are that the landlord will be guaranteed a certain rental income during the term of the lease and, provided that the lease is contracted out of the security of tenure provisions conferred by the Landlord & Tenant Act 1954, the landlord will be entitled to possession of the premises on expiry of the contractual term.
The parties can achieve flexibility on the term length by including a rolling break clause for either or both parties.
A lease will attract occupiers as it gives them security and certainty.
The tenant has exclusive possession of the premises, and the landlord generally has limited rights of access.
However, even short-term leases tend to be lengthy documents, and it can take a long time to negotiate, agree and complete the lease.
As a result, the legal costs for preparing and negotiating a lease will be higher than those for a licence or tenancy at will.
Another disadvantage for tenants is that depending on the level of rent and length of term, SDLT or LTT may be payable on the lease.
Licence to occupy
A licence is a personal right that grants permission for the licensee to do something on the licensor's property.
A licence is not an estate in land.
The main advantage of a licence to occupy is that the document will usually be much shorter than a lease and can be prepared, negotiated and completed more quickly and at less expense.
If properly drafted, a licence to occupy will not confer security of tenure on the licensee since it is outside the scope of the Landlord & Tenant Act 1954.
However, it is crucial that property owners instruct a solicitor to draft the licence on their behalf, as it is easy to inadvertently create a lease if due care and attention are not taken in the preparation of the document.
If the licence is, in fact, a lease, and the arrangement with the occupier has been in place for over six months or is on a periodic basis, then the property owner could be at risk of a claim that the occupier has a secure tenancy pursuant to the Landlord & Tenant Act 1954.
Again, whether exclusive possession is granted is key.
If the document is labelled as a licence but gives the occupant exclusive possession of the premises, then the occupancy will be construed as a lease or tenancy rather than a licence.
Other characteristics that may indicate that a "licence" is not really a licence are that it is for a fixed term and it reserves a rent.
An advantage for the occupier is that, generally, there is no SDLT or LTT payable on the grant of a licence to occupy.
The exception would be where the occupation of the property under the licence amounts to substantial performance of an agreement for lease and triggers a liability to pay SDLT or LTT.
However, some occupiers may object to being offered occupation on a licence arrangement since they do not offer the same security and certainty as a lease.
If the owner of the property sells it, then the licence will end, and the only recourse for the licensee would be a right of action against the original licensor for breach of contract.
Although licences do not offer the same security as a lease, they are likely to be more attractive to occupiers than a tenancy at will.
A licensee is entitled to whatever length of the notice period the licence agreement provides for, whereas a tenancy at will can be terminated on immediate notice.
Tenancy at will
A tenancy at will is a tenancy that can be terminated by either party at any time.
A tenancy at will is not an estate in land; it is a personal relationship between the original parties.
As with a licence, a tenancy at will is generally a short document and can be prepared, negotiated and completed very quickly and cheaply.
A property owner can quickly recover possession of the premises by telling the occupier that the tenancy is at an end and that the owner requires immediate possession.
The downside of this is that the property owner is not guaranteed rental income for a specified period because the tenancy can be determined instantly by either party.
A properly drawn-up tenancy at will does not give the tenant security of tenure since it is outside the scope of the Landlord & Tenant Act 1954.
However, if not carefully drafted, a tenancy at will could end up being a periodic tenancy.
This would give the tenant security of tenure under the Landlord & Tenant Act 1954 from the date of occupation.
Occupiers benefit from the fact that, generally, no SDLT or LTT is payable on the grant of the tenancy.
However, as tenancies at will can be determined instantly, this type of arrangement does not offer security or certainty and may not be considered attractive by occupiers.