Our legal experts Baines Wilson LLP give businesses looking at licence and tenancy agreements some food for thought. Here are the type of agreements you want to consider carefully.

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When an owner of commercial premises wishes to allow a third party to occupy their property, they have to decide the type of arrangement they wish to put in place. There are various ways in which a property may be lawfully occupied, three of the most common being a lease (tenancy), a licence to occupy and a tenancy at will.

Many commercial property owners wish to avoid incurring the time and expense associated with granting a lease. There is an attraction in situations such as this for a landowner to simply allow the occupation on an informal basis, without taking advice or considering the implications.

As an alternative to a lease, tenancies at will and licences to occupy are often considered to be a solution for landowners who wish to allow short term, flexible occupation of a property. However, it is important for landowners to be aware of the potential pitfalls, as well as the benefits, of such arrangements before deciding whether either of these methods should be used or if a lease would be the safest approach. They are not always as suitable or straightforward as they first seem.

Licence to Occupy

A licence is a personal right which simply grants permission for a third party (licensee) to do something on a landowner’s (licensor’s) property and prevents the permitted act from being a trespass. They are often used between a prospective landlord and tenant between exchange of an agreement for lease and the grant of the lease.

A licence is generally the least expensive and quickest form of document to draw up and they usually cover a relatively short period of time of up to six months. A licence does not grant the occupier a right to exclude the landlord from the premises unlike a lease. Whilst these features can be beneficial to a landlord, they need to be weighed against the risks associated with such an arrangement.

The main risk of using a licence is that an occupier may claim that the arrangement is in fact a lease. The courts have made it clear that they will look at the substance of an agreement rather than the label attached to it in order to determine the nature of such when a dispute arises. If a licence grants exclusive occupation of the property, is for a fixed term, and reserves a rent, then it is likely to qualify as a lease. If the occupation is a lease then it may also be protected under the Landlord and Tenant Act 1954. This Act provides a tenant of business premises with (in the circumstances and subject to the conditions prescribed in the Act) a right to renew a tenancy. Although under the Act the Landlord may be entitled to oppose renewal, it is not always a simple process and statutory compensation can be payable by the Landlord to the Tenant in certain circumstances where a tenancy is opposed. If the Act was deemed to be applicable, this would mean that the very issue the owner wished to avoid by using a simple licence had failed and placed the owner in a potentially worse position.

In terms of how the licence can come to an end, 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). In respect of whether a licence remains in place if a landlord sells their interest, it is unlikely that it will be binding on the owner’s successors in title due to a licence being a personal right. This is the case even if the licence expressly states that it will be binding, and even if the successor in title has notice of the licence arrangement.

Licences tend to more appropriate for arrangements where it is agreed that the occupier can be relocated to other parts of the building, or where occupation is for limited hours of the day.

Tenancy at Will

A tenancy at will is a short flexible agreement which closely resembles a licence in content and detail, the key differences being that it gives exclusive possession and that can be terminated by either party without notice (which means that an arrangement of this type should only be used in limited circumstances). They are most commonly used where the parties are in lease negotiations and want to document a short-term occupational arrangement pending completion of a lease.

As with licences, careful attention needs to be paid when drafting a tenancy at will so as not to create a periodic tenancy under which the tenant would have the protection under the Landlord and Tenant Act 1954.

It should also be noted that a tenancy at will offers even less security than a licence to occupy. A tenancy at will is a personal arrangement between a landlord and a tenant that depends on the continuing will of each party (i.e. it cannot be assigned to anyone else). This can be a significant concern to landlords, whose income stream can end with no notice. Further, this also means that the arrangement will cease to exist where a landlord sells their interest in the property.

What is the alternative?

A short term lease for a fixed term and expressly excluded from the protection of the Landlord and Tenant Act 1954 can often be a safer option for commercial landlords as it offers certainty of recovering possession on the contractual expiry date of the term and can have flexibility through the use of mutual break clauses which allow either party to bring them to an end early. A lease will provide certainty as to the agreed terms between the parties and confers a more secure period of income for the Landlord. Whilst the drafting of such an arrangement will require legal involvement in order to ensure that the Lease is properly excluded from the Landlord and Tenant Act 1954 (certain documentation is required to do this), this cost must be weighed against the risks and uncertainty which may arise with an alternative arrangement.

We would always advise both owners and occupiers of property to enter into a formal, legally binding arrangement that properly suits their requirements. A landowner should identify their intentions and requirements in relation to any occupational arrangement at the outset as a failure to do so can prove to be costly. For help and advice in relation to the above or any other commercial property advice please contact a member of our commercial property team on law@baineswilson.co.uk or 01228 552600/ 01524 548494.