Gurmail Sidhu
Senior Solicitor
1 Feb, 2011

I often get asked this question particularly in relation to commercial property.
The reply is that it would depend on the intention of the parties and how they envisage the relationship between them in relation to the property working and their needs and requirements and of the tenant/licensee's business and the Landlord/licensor's future plans for the property.

Both leases and licences have advantages and disadvantages for both parties.

It is important to distinguish between the 2 relationships created by these documents; the differences are sometimes very subtle and blurred. It is very difficult to create a document and be absolutely certain that the relationship created is that of a landlord and Tenant or a licensor and licensee. It is easier to create with certainty the landlord/tenant relationship than the licensor/licensee relationship. There has been significant case law which turns on situations where the parties called a relationship as being Licensor /Licensee and then there is a claim that in reality that the relation ship that is created is that of Landlord/Tenant giving rise to very different rights and obligations.

It is not sufficient for a document to be called a lease or a licence and to believe that, that is the relationship. The courts are not interested in what you call it, they are interested as to what is created in fact, taking into account all of the circumstances, the rights and obligations which are agreed between the parties and what their intentions were.

Essentially a lease creates an interest in the property and a licence creates rights which are exercisable over the property

The reason for determining one or the other is primarily that if the relationship is construed as a Lease then the provisions of the Landlord and tenant Act 1954 part II will apply. These provide security of tenure for the tenant and make provision for compensation if the landlord does not agree to the renewal of the lease at the end of the initial term and the rent that the Landlord can demand on the renewal.  The existing term can only be brought to an end by the use of the procedures and provisions contained in that Act. The tenant has a statutory right to a new lease. The grounds on which a landlord can refuse a new lease are limited to specific circumstances.

In the case of licences, they terminate on the date specified or agreed between the parties and in the absence of agreement by the giving of reasonable notice.

Some of the main factors which indicate the relationship to be a lease as apposed to a licence are matters such as:

• Exclusive possession (specific area)
• A covenant for quiet enjoyment
• A long length of term and for a fixed term and a fixed rent
• The rent being exclusive of services or other property outgoings.
• The right of entry or inspection or rights of way to the owner (Landlord)

In deciding whether to create which relationship the parties should look at what their existing and future plans are. The interests of the parties can be and are usually opposite. There is always a conflict of their interests. E.g. the landlords interest is to obtain maximum rent and ensure that the property is kept in the best condition and may be to let the property (in the case of a good tenant) for as long as possible. This increases the capital value of his investment. The tenant's interest may be to keep the rent as low as possible and ha as few obligations as possible and ensure that they as least onerous as possible and in the case of uncertainty to have the ability to be released from the obligations as soon as possible should he decide to leave for any one of a number of reasons.

For these reasons before the parties enter into a lease or a licence they should take expert legal advice to look after their respective interests.

At Douglas Wemyss Solicitors, we are here to provide that advice.