Licence to occupy…or is it?
When is a licence actually a lease? Dean Bickford from our Commercial Property team considers the consequences of a licence to occupy actually being a lease.
“We have found a new occupier. Can we just grant them a licence to occupy, so they are in and can trade?”
This is a question that we are regularly asked by our property-owning clients. Understandably, they see a licence as a quick solution for owners and occupiers, when both are keen to get the property occupied. Licences can often be put in place at relatively low cost and usually without delay. The occupier can get on and use the property whilst the property owner has someone to cover the occupational costs.
However, both may realise that what they have is not quite what they intended. This can lead to either party finding themselves in a situation which can be costly, particularly if the relationship breaks down. This is often the case where the property owner is trying to recover possession and the occupier does not want to leave. Whether the arrangement is a lease or a licence will materially impact on who wins the argument.
The first point to note is that whether the arrangement is a lease or licence will depend on the facts (not simply the name of the document, or what the parties are labelled).
Two of the main points to consider are:
- Does the occupier have exclusivity of possession? In other words, can they prevent the owner (or anyone else) from entering the property.
- Is the arrangement for a fixed term? If it is open-ended, this is usually a key factor in determining that the arrangement is a licence.
Exploring further what amounts to exclusivity of possession, this has been considered by the courts on a number of occasions. In each case you have to take a practical approach.
For example, where the owner grants a licence of a unit on an estate, or a workstation or an office in a larger building, the owner may retain the right to move the occupier to a different unit, thereby ensuring that no exclusive possession has been granted. This may seem reasonable for a small office with little or no furniture.
However, if the licence is of bare land and the occupier has stored large items (such as portacabins) or keeps heavy plant or materials on the land, is it realistic to expect the occupier to move them to another location during the term of the licence at short notice? This can be a factor in the courts determining that the licence is in reality a lease as neither party ever realistically intended for the occupier to move to an alternative area within the property owner’s land. In that case it would be exclusive possession and so may be a lease.
Should the licence be construed as a lease, there are a number of issues for both parties to bear in mind:
- Right to remain: Depending on the length of the licence, the occupier may have a lawful right to remain when the arrangement expires (known as security of tenure). This may cause problems for an owner who has plans to redevelop or relet.
- Tax: A licence may not be subject to Stamp Duty Land Tax, whereas a lease may incur a charge. The occupier may find itself liable to interest and penalties in addition to the tax charge itself if it failed to pay the SDLT when the lease was granted.
- MEES: The owner should be mindful of the restrictions on granting leases of property below the minimum Energy Performance threshold.
These are just a few points for both landowners and occupiers to consider in entering arrangements permitting occupation. Licences do have their benefits, but it is important to ensure that the arrangement fits the parties’ intentions so neither gets caught out.