Why you want a lease and not a licence
What is the difference between a lease and a licence, and why is it better to have a lease without security of tenure rather than a licence?
These terms can appear confusing, but there are actually specifically defined reasons why they are different – and they offer different things:
A lease creates an interest in the property, i.e. exclusive possession for a determined amount of time. A licence is a simple permission to do something on the property to prevent the permitted act from being a trespass. It is just a personal right and does not create an estate in land, as in a lease. A lease can be transferred (unless prohibited by a term in the lease), but not a licence. A licence can be revoked at any time, while a lease cannot be revoked – although it can be terminated if the terms include a break clause or the tenant surrenders the lease.
Why is the distinction important for landlords?
Firstly, if a tenant occupies for the purposes of carrying on a business, then the Landlord and Tenant Act 1954 provides that the tenant will have a right to renew tenancy upon expiry of the old one. This would be an unwelcome result where a landlord only wanted to let the property on a short-term basis. The landlord could only oppose the application for a new lease in very limited circumstances. Note however that Section 43(3) of the Landlord and Tenant Act 1954 makes the statutory protection inapplicable to leases granted for a term shorter than 6 months (with certain exceptions).
Secondly, Stamp Duty Land Tax may be payable on a lease whereas licences are exempt.
Without careful drafting, a landlord intending to grant a licence could be granting a lease by affording the tenant exclusive possession of the premises. The label on the document does not matter. If it satisfies the requirements of a tenancy then the parties cannot alter the effect of the agreement by calling it something different.
The landlord would have to ensure that the terms of the licence are drafted so as not to give the occupier exclusive possession, and to limit the term to less than 6 months. Alternatively, to avoid any uncertainty, the landlord could grant a lease that has been excluded from the protection of the Landlord and Tenant Act 1954.
Here at Gregg Latchams, we act for a number of landlords who have created simple licences – usually to help their tenant out. This can and does regularly result in difficulties: not only with the ongoing landlord and tenant relationship, but on sale of the property.
We suggest that if you are a landlord, you call us to run through matters before you enter into licence arrangements or allow someone into early occupation. Make sure that you speak to our expert, Karl Stephan.