FAQs - Short term occupation of premises – the options

These FAQs deal with issues that property owners and occupiers of business premises may face when deciding how to occupy premises on a short term basis and look at the three main options of a lease, licence and tenancy at will.

What is a lease?

A lease is the grant of a right to use or occupy land exclusively for a specified period of time, usually in exchange for rent. The period of time must be less than that held by the grantor (the landlord) and it must be of certain duration.

A lease is a contractual relationship and is also an estate in land, which means that it is capable of existing independently of contract. Thus a lease will continue after an assignment of the lease by a tenant or after an assignment of the reversionary interest by the landlord. 

The traditional test for a lease is that the occupier has exclusive possession of the premises as well as the lease being for a fixed term. Exclusive possession is the right of a tenant to exclude all other people including the landlord and third parties from the land (such as the landlord’s agents) except to the extent that the landlord has reserved rights of entry under the lease to carry out works, for example.

“Possession” is not the same as “occupation”. A tenant (Tenant A) may have possession by virtue of being able to receive the rents and profits of the land (reflecting Tenant A’s right of ownership under their lease) but Tenant A may have granted an underlease to an undertenant (Tenant B) and so the person in occupation would be Tenant B.

Does a lease grant an interest in land?

Yes, a lease grants a tenant an interest in land whereas a licence and tenancy at will do not. A licence and a tenancy at will grants the personal right for the licensee/tenant to occupy and use land for a permitted purpose, which, without the licence/tenancy at will being in place, would be considered a trespass.

What is a licence?

A licence is a personal right or permission given by the land owner (the licensor) for the licensee (the person being granted the right) to do something on the licensor’s land. The licensee is given permission to use the land for the authorised purpose and effectively prevents that act from being a trespass. Unlike a lease, a licence does not create an estate in land.

A licence can be for a fixed period of time and it can reserve a payment (a licence fee). However, a licence does not grant exclusive possession - unlike a lease. So, at any time during the licence period, the licensor could ask the licensee to occupy a different area in a building than the area used initially.

How the licence may come to an end will depend on the terms of the licence but it will often provide for a fixed period of notice to be given by either party and the licensor will not usually be able to terminate on no notice (unlike a tenancy at will, see below).

Examples of where a licence to occupy property may be used include:

• between a seller and a buyer during the period between exchange and completion of a sale contract
• between a prospective landlord and tenant between exchange of an agreement of lease and the grant of a lease.

How do you distinguish between a lease and a licence?

It is not always easy to distinguish between a lease and a licence. Just because a document is labelled as a lease it is not conclusive that the document is in fact a lease. It must have the key elements noted above and, if tested, a court will look at the substance of the relationship that has been created as well as the form of agreement in deciding whether a lease or licence has been granted. Therefore, a tenancy should not be called a licence if it is in reality a lease. In addition, a lease may still come into existence notwithstanding the express terms of the contract if exclusive possession is granted.

Consideration will need to be given to the Landlord and Tenant Act 1954 (the 1954 Act) and whether the lease to be granted is to be “inside” or “outside” the 1954 Act. Under Part II of the 1954 Act, a tenant occupying premises for business purposes has a statutory right to renew its tenancy at the end of the lease term. The landlord is able to oppose the lease renewal on limited grounds only and subject to paying compensation to the tenant. 

A fixed term lease for six months or less is automatically outside the security of tenure provisions of the 1954 Act. A lease will usually take longer to negotiate than a tenancy at will and so if a tenant requires occupation within a short timeframe, a tenancy at will may be appropriate for a short period (see below for more details regarding tenancies at will).

What is a tenancy at will?

A tenancy at will is a tenancy on terms that either party may determine at any time. A tenancy at will may be expressed or implied and, like a licence, it does not create an estate in land. A tenancy at will does not, for example, usually permit a tenant to carry out works thereby avoiding the tenancy being construed as a lease. A tenancy at will is personal to the tenant and cannot be assigned.

Tenancies at will are often used where parties are negotiating lease terms but the tenant requires occupation prior to completion of the lease. In comparison to a lease, a tenancy at will is a short and reasonably straightforward document (and therefore often costs less than drafting a lease) that would reserve the payment of rent. Often the rental figure is inclusive of service charges and insurance contributions but this is not always the case so this would need to be checked in each instance. 

A tenancy at will is intended to be a short term solution for a period of no more than six months. A tenancy at will is outside the security of tenure provisions of the 1954 Act. However, the longer that a tenancy at will continues, the greater the possibility that the tenancy may be construed as a lease inside the 1954 Act. 

Care needs to be taken to ensure the tenancy is properly drafted as otherwise there could be a danger that the tenancy at will may instead be a periodic tenancy, which would require a longer period of notice to be given to determine the tenancy.

A tenancy at will may be terminated by either party on no notice (although where a landlord determines the tenancy, the tenant will have a reasonable period to remove its goods). For the tenant to validly terminate the tenancy, it must give notice as well as give up possession of the premises.

The tenancy automatically ends on the transfer of the reversion by the landlord; by the death of either party if the parties are individuals; or where a new interest in land is granted, for example a new fixed term lease.

Can a licence or tenancy at will confer security of tenure under Part II of the Landlord and Tenant Act 1954?

No, provided the licence or tenancy at will is properly drafted, the tenant will not have security of tenure.

Which gives the occupier the most control over the premises – a lease, a licence or a tenancy at will?

A lease will generally give the occupier the most control over land as it grants the tenant an interest in land whereas a licence and a tenancy at will are merely personal rights.

When is Stamp Duty Land Tax (SDLT) payable?

The grant of a lease may attract SDLT. Tenancies at will and licences to occupy are exempt interests outside the scope of SDLT and therefore SDLT is not payable. However, a licence or tenancy at will joined with an agreement for lease may trigger SDLT liability where the tenant takes possession.