Many individuals and businesses want to rent out property (whether a room or an entire building) to guarantee an income stream. However, a continuing challenge is the fact that the owner of the property may also want to try to ensure that they can secure the return of the property with the minimum fuss and, crucially, cost.
One tactic that property owners may try to use in the circumstances is to allow someone into occupation of their property but to describe the arrangement as a licence rather than a lease.
The distinction between a lease and licence is crucial. A lease is a legally binding contractual arrangement. The tenant will agree to pay the landlord rent for exclusive occupation of a property for a fixed period of time. A lease gives the tenant the right to possess the property and to exclude all others including the landlord. A lease will create a legal interest in the property. Accordingly, if the property is sold during the term of the lease, the buyer would purchase subject to the lease and the tenant's occupation of the property.
A licence is a different arrangement altogether. A licence is a personal right to use premises for a particular purpose. It does not create a legal interest in land and does grant exclusive possession.
The case law in this area is longstanding and well established. In Street-v-Mountford (1985) the House of Lords held that in the event that there is a dispute as to the nature of such an arrangement between the parties, a court would look at the substance of the arrangement rather than the label that had been given.
It is therefore important for anyone wanting to let out their property to take specialist legal advice to ensure that they do not inadvertently create a lease when they had perhaps been hoping to only create a licence.
A court would look at the true intention of the parties and would look at the reality of the arrangements. If someone has been granted what appears to be exclusive occupation of a property in return for payment of rent, it is likely that a court will decide that a lease has been created, whatever the parties decide to call the arrangement.
The danger for property owners is even more acute where there is a commercial property involved. This is because a licence could, in fact, earn the tenant the right to claim protection under the Landlord and Tenant Act 1954. This Act gives security of tenure to business tenants and allows them to remain on the premises once their agreement has come to an end and to request a renewal of the arrangement on the same terms.
To avoid these difficulties, you should take specialist legal advice.
To discuss this or any other landlord and tenant related matter contact us.