Licence to Occupy or Lease?

A licence to occupy can provide a property owner with a quick, easy and flexible way of letting out commercial premises, or even a room in their own home, avoiding the formalities and legalities of a commercial lease or residential tenancy. However, it is important to know how licences work, legally speaking, and when these should be used.

In this guide, we look at what a licence to occupy is, comparing the benefits of a licence over a lease or tenancy, and setting out the potential risks involved.

 

What is a licence to occupy?

 

A licence to occupy is an agreement between a property owner (‘the licensor’) and an occupier (‘the licensee’), making provision for the licensee to use or occupy the subject property. It is essentially personal permission to allow occupation.

There are two different types of licence to occupy:

 

a. a bare licence: this is where the licensee is given verbal permission to stay in the licensor’s property, for example, when staying overnight at a friend’s house.

b. a contractual licence: this can be either verbal or in writing, but for a contract to exist there must be some consideration, for example, where a lodger rents a spare room in someone’s house and pays their live-in-landlord an agreed sum of money for its use.

 

Under a contractual licence, the licensor provides the licensee with non-exclusive possession. This could be for a fixed term, for example, 6 or 12 months, or on a periodic basis, normally either weekly or monthly. In return, the licensee will typically pay the licensor a fee, where a licence with no set end date will automatically renew at the frequency of licence fee payments.

 

When is a licence to occupy used?

 

A licence to occupy is a routine arrangement designed to regulate a person’s occupation in a property, especially in the context of live-in-landlords renting out a spare room in their own home. These are usually agreements to occupy on an ongoing basis and can be long-term.

In the context of commercial arrangements, licences to occupy tend to be more short-term, and are often used as a temporary solution for businesses whilst they look for more permanent premises. A licence can also be used prior to the grant of a formal lease when the parties are negotiating terms, but the tenant requires early access to the premises, or as between a buyer and a seller of property in the period between exchange and completion.

Other examples of when licences to occupy are used could include serviced office space, or unused warehouse space, and department store concession arrangements.

 

Is a licence to occupy legally binding?

 

A licence to occupy does not grant a licensee with a legal interest in the subject property, where a licensee does not have the right to exclusive occupation. However, a licence is still legally binding, even if the agreement is not set out in writing.

A licence to occupy is a contractual arrangement between the licensor and licensee, where this can be used to set out various legally enforceable rights and responsibilities between the parties. Where a licence to occupy agreement is drawn up in writing, its provisions will typically include the licence period, licence fee and respective notice periods, as well as restrictions on use of the property, the right to make alterations and property maintenance.

 

How is a licence to occupy terminated?

 

Lodgers are classed as ‘excluded occupiers’, where a live-in-landlord can evict a lodger without going to court if either a fixed term agreement has ended or after giving notice on a rolling contract. If there is a written agreement, this may specify how much notice must be given and whether this notice needs to be in writing. Otherwise, notice can be given either verbally or in writing, but must be reasonable, for example, a week’s notice if rent is paid weekly or a month if paid monthly. Notice may also be given prior to expiry of a fixed term agreement, provided the contract makes provision for the landlord to end the living arrangement early.

If a lodger fails to move out at the end of a fixed term, or when notice has been given, the landlord can evict them peaceably. For example, they could change the locks while the lodger was out. However, it is a criminal offence for a landlord to use or threaten violence to evict someone. The landlord must also take reasonable care of any belongings left at the property and attempt to make arrangements for these to be collected within a reasonable timeframe.

Similarly, a licensee in commercial premises will be afforded very little security of tenure. This means that the licensor does not have to obtain a possession order to evict the licensee, where they will only be required to give reasonable notice. On expiry of this notice, the licensee will have no legal right to remain in the property and will be required to vacate.

If a licensee wants to leave, either in the context of a commercial or residential licence arrangement, much will depend on the terms of any written agreement and whether provision is made for notice to be given on their part. If the agreement is fixed-term, the licensee may not be able to give notice unless the agreement contains a break-clause that allows them do this. Absent any written agreement, the licensee can leave after giving ‘reasonable notice’.

 

What is the difference between a licence to occupy and a lease?

 

A licence to occupy is distinct and very different to a lease, where a tenant will be afforded far greater rights under a lease or tenancy than a licensee. This is because a licence will merely provide the licensee with non-exclusive possession of a property, where the licensor can occupy the property, or part of it, or grant further licences to other licensees.

Leases, by comparison, provide tenants with the legal right to possession of the property, to the exclusion of all others during the term of the agreement. This includes exclusion of the landlord who, under a lease or tenancy, is only usually entitled to enter a tenanted property after giving reasonable notice to carry out inspections or property repairs, or in emergencies.

A licence will also afford a licensee far less protection from eviction. This is because a licence will not grant the licensee the same security of tenure given to tenants by law. Security of tenure basically refers to the right to stay on in the premises after expiry of the contractual term. Unless expressly excluded under the terms of a commercial lease, a tenant will be entitled to security of tenure, providing the tenant with the right to remain in the property even after their lease has expired, until such time as they are evicted via the courts. They will also have the legal right to request a new lease on the same terms as the previous lease, where there are only limited statutory grounds on which the landlord can refuse the grant of a lease.

Similar comparisons can also be drawn between a licence to rent a room in a house and a residential tenancy, where a lodger, but not a tenant, can be evicted without a court order.

 

Risks of using a licence to occupy

 

A licence to occupy will provide the licensor with far greater flexibility than a lease. A licence also has fewer formalities, making it much quicker, easier and cheaper to use. When entering into a commercial lease, this can often involve lengthy negotiations, followed by the drafting of a number of comprehensive provisions to reflect what has been agreed between the parties. A licence to occupy can therefore serve as an extremely useful tool for property owners, but only when fully understood and used in appropriate circumstances.

There are various risks when using a licence to occupy, not least where a property owner is trying to treat what is actually a lease or tenancy of a property a ‘licence’, for example, by stating that there is no exclusive occupation. It is a common misapprehension that where exclusivity of use is not expressly written into an agreement, this will be construed as a licence to occupy if there is a dispute between the parties and that dispute goes to court.

It is also not uncommon for a property owner to describe an arrangement as a licence when it is, in reality, a lease. Simply calling an agreement a licence will not be enough to make it so, where the courts will always look at the substance of an arrangement, rather than at what the document is called, or the terminology used within it, to determine the nature of the legal relationship between the parties. The key determining factor as to whether an arrangement is a licence, or a lease or tenancy, is whether the party in occupation has a right of ‘exclusive use’ of those premises. If the party occupying the premises can legally lock the property owner out, then it will generally be deemed to be a lease. The courts will also look at the parties intentions and conduct in the context of the circumstances surrounding the arrangement.

This means that even if a document calls itself a licence, if it has the characteristics of a lease or tenancy, then the property owner could be deemed to have granted a lease or tenancy instead. If the agreement is for commercial premises with a term of more than 6 months, the occupier will be afforded far greater security of tenure, together with a statutory right to renew the agreement, making it much more difficult to evict them.

Equally, a residential tenant with exclusive possession may have an assured shorthold tenancy, where seeking possession can be time-consuming and costly.

 

Best practice

 

When using a licence to occupy, even though this can be verbal, it is always best to set out the rights and responsibilities of each party in writing. By having a written agreement, both the licensor and licensee will have a clear understanding as to the basis of the licensee’s occupation of the property and how this can be brought to an end. The granting of a licence to occupy is usually more temporary in nature than a lease or tenancy, but even if only short-term, it is important that the arrangement is set out in writing, together with notice periods.

Equally, it is important that any notice to terminate a licence to occupy is put in writing. Unless there is a contract making provision for written notice, a licensor can give notice verbally. However, in the event of any subsequent dispute, it is always best to have a paper trail of when the licensee was asked to move out and how much notice they were given to do so.

Finally, a licence to occupy should always be used with caution. In many cases, it can be the best way to provide a short-term or flexible rental arrangement, both in a commercial and residential context. However, if a licence to occupy is being used to describe a lease or tenancy arrangement, it carries the inherent risk that it will still be deemed to be a lease or tenancy.

Certainly in the context of commercial leases, where exclusive occupation is being granted to an occupier, rather than trying to describe a lease arrangement as a licence, it may be better to grant a lease but negotiate a ‘contracting out’ provision to exclude any security of tenure. When it comes to commercial property, it is possible for the parties to agree to exclude the statutory provisions which provide the tenant with the right to remain in the property upon expiry of the lease and the right to renew the lease at the end of the term.

Equally, in any scenario where a licence is used to allow a party to occupy premises whilst the terms of a lease are being negotiated and agreed, even though the prospective tenant ultimately intends to complete a lease, the landlord should remain mindful of the risk of security of tenure arising under the initial licence arrangement. In these circumstances, the landlord can either seek to exclude security of tenure before access is granted by serving the necessary notice on the tenant, or grant a fixed term lease of less than 6 months which does not attract the same security of tenure in the first place.

 

Legal disclaimer

 

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.