Lease or licence and why it matters Whether a party

							                             Lease or licence – and why it matters

Whether a party is an occupier, or allowing another into occupation of its premises, the legal
basis of that arrangement is of fundamental importance to both parties. The reason why was
illustrated in one of our recent cases.

Our client is a charity which is responsible for a large community centre. It allows local groups
to occupy the Centre, and asks them to sign a document headed ‘licence’ which sets out the
terms of occupation (for payments, rules, and termination). Sometimes occupiers do not get
around to signing the licences, but even if they do, there can be uncertainty about their status.

The charity had taken steps to exclude the occupier from part of the Centre on the basis that
his licence had been terminated. In response, it found itself not only accused of having forged a
licence to an occupier (therein lies another story, but in short our client resisted the allegation in
court), but also having to defend the claim that even if the licence document was not forged, it
was still not a true reflection of the actual terms of occupation, that is, it was a ‘sham’ and had
created a tenancy.

The differences between a lease and a licence matter a great deal. A lease is a tangible legal
asset; it gives someone a right to possess property, and to deal with that property however they
see fit (subject to the terms of the lease). For example, unless the right is specifically excluded
by a lease, a tenant can sell the lease, or sublet to someone else.

On the other hand, a licence is merely a contractual right to occupy space for a period of time.
At its simplest, a ticket to a theatre is a licence to allow the audience member to ‘occupy’ part
of the theatre for a limited time.

There are a number of factors than can cause an occupier to be a lessee or a licensee,
including the question of the payment of money, and the extent of an occupier’s obligations.
However, as a general rule the defining factor as to whether an arrangement is a lease or a
licence is whether the occupier has a right of exclusive occupation, that is, whether he or she
can keep other people (including the landlord) out of defined premises.

There are practical effects arising from these differences.

In relation to business tenancies, leases are generally protected by Part II of the Landlord and
Tenant Act 1954; this means that when the contractual term length of the business lease comes
to an end, the tenant’s right to occupy the premises continues and (subject to other
requirements in the 1954 Act), a landlord would not be able to recover possession of the
business premises unless a notice procedure has been complied with, and one or more of a
limited number of grounds for possession has been established.

In residential occupation, the difference between a lease and a licence is also very significant.
For example, the Rent Act 1977 and the Housing Act 1988 apply to leases but not to licences.
This was particularly important in the era of Rent Act tenancies when occupiers not only had
protection from termination of their tenancies, but also benefitted from reduced rents. In order
to try to get around this difficulty (for landlords), it was not unusual for landlords to ask tenants
to sign a document that called itself a licence. That document would also, on the face of it,
contain the sort of terms that a licence might include (the right to allow others to share the
occupation being one of them, because of the importance of the issue of exclusive occupation).

In a landmark House of Lords case (Street v Mountford), the court decided that when trying to
decide between a lease or a licence, it had to look at the arrangement that actually existed, and
not necessarily the label given to it by the parties. Therefore, parties cannot deliberately make a
licence out of what is actually a lease. This gave judicial effect to the maxim that ‘a rose by any
other name would smell as sweet’.

Why this was all relevant in our charity case was because the tenant/licensee/occupier argued
that, even if the ‘licence’ was not forged, it was a sham, and did not reflect the real basis of
occupation (which he maintained was as a tenant). If the occupier could persuade the judge
that it was a tenant, then our client had wrongfully excluded the occupier, who would be allowed
into the premises against our client’s wishes.

In the end the judge was satisfied that the basis on which people occupied the Centre was as
licensees, not as tenants, and decided in favour of our client; the lack of exclusive occupation
was noted by the Court. The whole claim, as well as being time consuming and expensive for
our client (although it has an order for its costs to be paid by the former occupier) has caused
our client to review both its documentation and the basis on which it allows occupiers into the
Centre.




Paul Greatholder
Solicitor, Russell-Cooke
Paul.Greatholder@russell-cooke.co.uk
May 2007




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