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Licences, leases and how you could lose out

22nd August 2018

If you own or manage a commercial property, you could be making a costly mistake by purporting to grant a licence to occupy, rather than a lease.

A 2018 High Court judgment once again highlights the difference between these two types of agreement, along with the risks you may face if you inadvertently grant a lease.

London College of Business Ltd v Tareem Ltd [2018] EWHC 437 (Ch)

 The Facts 

  1. A college occupied a property pursuant to a number of consecutive agreements which purported to be licences to occupy.
  2. Following a dispute between the parties over the amounts payable by the college for its occupation, and relying on its view that the college was in arrears, the land owner changed the locks to the property, excluding the college.
  3. The college was able to obtain an injunction against the land owner, requiring that the keys be released back to them.
  4. The college claimed that it was wrongfully excluded from the property and that it suffered substantial losses as a result. This formed the basis of the claim that was decided by the High Court in 2018.

The Judgement

Central to the argument was the question of whether or not the agreement constituted a licence or a lease.

In the famous case of Street v Mountford, it was held that courts should look not merely at the form of an agreement for occupation, but also at the substance of that agreement. In essence, simply labelling an agreement as a ‘licence’ does not necessarily make it so.

One important marker that an agreement may be a lease is that the occupier has possession of the property to the exclusion of all others, including the landlord (subject of course to appropriate re-entry and forfeiture provisions).

In the case of London College of Business Ltd v Tareem Ltd, it was successfully argued that the college had exclusive possession of the property and that the agreement to occupy formed a business tenancy within the remit of the Landlord and Tenant Act 1954.

This decision was reached despite the agreement describing itself on numerous occasions as a ‘licence’.

A lease within the protection of the Landlord and Tenant Act 1954 can be forfeited by a landlord, so long as there are appropriate provisions within the agreement allowing it do so.

In this case, there was a mechanism within the agreement allowing for forfeiture where payment was in arrears. The court, however, held that when the land owner took steps to change the locks at the property, this mechanism was not correctly followed.

The college was therefore wrongly excluded from the premises and damages were awarded.

The Consequences

The result of this case has wider implications for commercial property owners in England and Wales.

A business tenancy within Part II of the Landlord and Tenant Act 1954 is afforded the benefit of security of tenure, unless the relevant provisions are correctly excluded within the lease.

A lease with the benefit of security of tenure can be renewed at its conclusion on similar terms. This right of renewal is subject only to a very small number of grounds on which a landlord might appeal.

Parties entering into a licence no doubt favour the flexibility that this type of agreement offers and specifically the ease in which the relationship can be brought to an end.

As a result, the consequences of inadvertently granting a lease within the Landlord and Tenant Act 1954 could be catastrophic.

The flexibility of a licence to occupy can be attractive, however, if circumstances allow, granting a short term lease which is effectively excluded from the security of tenure provisions of the Landlord and Tenant Act 1954 may well be a safer option.

In all cases were the above is being considered, we would advise that you seek legal advice to ensure that your desired outcome can be achieved.

If you would like advice in relation to a commercial lease or any of the issues raised in this article, please contact Matthew Easter on 01543 267190 or by email at measter@ansonssolicitors.com