Licence, lease or tenancy at will?

When letting out properties on a short term basis, it is important to consider if the arrangement should be agreed by way of licence, lease or tenancy at will. There are clear benefits and disadvantages to different aspects of each; this article will explain each type of agreement and why they are often used.

Lease



A lease is a contract that grants an occupier (tenant) the right to the exclusive possession of land for a certain period of time. Once the lease has been granted by the landlord to the tenant, the tenant may exercise a right to exclude third parties, including the landlord from the premises. This is with the exception of circumstances whereby the landlord has reserved the right to enter the property to, for example and amongst other things, make necessary repairs or carry out works.

Under the Landlord and Tenant Act 1954, most leases (unless expressly excluded) benefit from ‘security of tenure’. Security of tenure means that once the term of the lease has expired, the tenant has the right to renew it on the same terms as the previous lease, thereby granting the tenant protection from eviction and a potential increase in costs.

A lease can also provide flexibility for both the landlord and the tenant by having a break clause which allows one or both parties to end the lease early. This could be a fixed date during the term, or it could be a rolling break clause for the duration of the lease.

Licence



The distinguishing feature of a lease is that the tenant has exclusive possession of a property, with the right to exclude third parties. Whereas, a licence is a personal agreement that grants a person (or a business) the right to occupy or carry out activities on someone else’s property. A licence cannot be assigned or transferred to a third party and does not usually create or grant any legal interest in the land. The landlord is known as the licensor, and the person to whom the licence is granted is known as the licensee. Licensees generally do not enjoy the same protections as a tenant under a lease.

Licences tend to cover a relatively short period of time, usually up to 12 months, whereas leases will typically have longer terms with more conditions. Licences normally give both the landlord and tenant the right to terminate the agreement with a shorter notice period as compared to a lease. This could therefore be a more favourable arrangement for a start-up business that is reluctant to commit to a long-term agreement, or when a landlord does not wish to offer the occupier the same level of protection as he would be required to for a lease.

Tenancy at will



A tenancy at will is used solely for commercial business tenancies. This exists where a tenant occupies a property with the right to exclusive possession from the landlord.   However, it is intended for short periods of time and either party may terminate the tenancy at any time with immediate effect. A tenancy at will can be either expressly granted or implied and, akin to a licence, it cannot be assigned to another party. It is, therefore, often used as an interim tenancy whilst the parties negotiate the terms of a lease to be granted for a fixed term. Both a licence and a tenancy at will, if correctly drafted, do not provide security of tenure to an occupant.

In each case, it is important that the appropriate form of agreement is employed to provide the parties with certainties from the outset depending on their intentions and what may be in their best interest. It is imperative that documents are drafted prudently, as poor drafting of a licence, for example, could inadvertently result in the agreement being deemed as a lease with the benefit of security of tenure.

Contact us

If you have business premises that you are planning to rent out and require assistance in drafting the appropriate documentation to suit your requirements or would like guidance on whether a licence, lease or tenancy at will is the right option for you, then please get in touch with our commercial property team.