Licences and tenancies at will

Leases (whether residential or commercial) give tenants a range of statutory protections. They include various forms of 'security of tenure', compensation for improvements and (in residential leases) protection from eviction and the regulation of costs such as service charges.

Licensees will generally not enjoy those protections. A licence might therefore seem to offer the owner of commercial property a way to allow occupation and use on an 'easy in, easy out' basis, without the need to follow complex statutory procedures. However, where there is any doubt about its legal effect the court will lean towards finding that an agreement is a lease rather than a licence so that the occupier has statutory rights and protections.

The court will determine whether an agreement is a lease or a licence by looking at its substance, not the label attached to it by the parties. In Street v Mountford [1985] 2 All ER 289 the House of Lords identified the hallmarks of a tenancy. They are:

• exclusive possession

• of defined premises

Payment of rent might also be an indication of a tenancy, but in fact rent is not required for a tenancy to exist.

In Ahmed, the Court of Appeal, held that the substance of an arrangement was such that there was not a tenancy at all, but simply an arrangement between three freeholders by which one of them might make an income out of the premises for so long as that ensured that the mortgage payments were met. It was no more than a permission. The payments were not rent and there was no tenancy.

Ahmed v Ahad (Deceased) (by his executor) [2011] All ER (D) 29 (Feb)

Pressure to permit access as 'licensee' often occurs where a would-be tenant wishes to begin trading (eg in the critical run up to Christmas) or to carry out fitting out works before completing a lease.

If trading is to be permitted, and if the licence relates to the whole of the property, then is it highly likely that the court would find that a right of exclusive possession has been given and that a tenancy has been created. For that reason, the use of a licence in those circumstances would be ill advised. If the full lease has yet to be agreed, but your instruction is to allow early occupation, then you should consider using a short term tenancy agreement that meets the criteria set out in Landlord and Tenant Act 1954, s 43 which will not attract security of tenure.

If access is to be permitted to carry out works then the form of licence should expressly state that it is only for that purpose. This is to make it clear that the licence does not give a right of exclusive possession. If a licence allows occupation to carry out works but allows the occupier to remain in occupation and to start its business, then all effective leverage to complete the lease will have been lost. The longer the 'licensee' remains in occupation the more likely it is that the agreement will be found to be, or to have become, a tenancy.

A licence may safely be used in circumstances where there will be no defined premises. For example, where it permits the:

• location of a barrow or kiosk within a shopping centre

• use of car parking spaces within a large area, or

• use of one or more 'hot desks' within an office

In any case, the key is to ensure that the Licensor retains the right to move the licensee around within the large area identified by the licence so that no particular area can be identified by the licensee as its own. It must also remain practically possible for the licensee to be moved around in that way. If, for example, the licensee occupies all of the spaces within a car park then there is a clear risk that the agreement will be found to be a lease. If occupation is for the purposes of a business then 1954 Act protection would apply.

Licence agreements frequently include clauses stating that no tenancy is to be created. Nonetheless, if the agreement has the hallmarks of a tenancy then it will create a tenancy. An exception to this rule was made in Clear Channel v Manchester BC [2005] All ER (D) 112 (Nov) but that exception applies only where the agreement is between commercial parties of comparable bargaining strength and with the benefit of legal advice.

Even if properly drafted at the outset as a true licence, it appears to be possible for the parties' conduct to alter the nature of the agreement so that a tenancy is created. In Portfolio Resources v Franks [2002] All ER (D) 292 licences were initially granted to two occupiers of a commercial garage. As neither occupier had rights over a defined area, no tenancy was created. Some time later the occupiers painted a line down the middle of the premises and subsequently acted as though it was a dividing line between their respective areas. Next, one of the occupiers moved out and the remaining occupier took up all of the space within the garage. The case was framed as a negligence action against the garage owner's solicitor and barrister and related to their advice that one or both of those actions might have resulted in the creation of a tenancy with 1954 Act protection. The court found that there was a risk of a tenancy having arisen, and so the solicitor and barrister were found to have been justified in warning that the occupier might have acquired 1954 Act protection.

Tenancies at will

The 1954 Act does not apply to a tenancy at will which arises when, with the consent of the landlord, a person occupies for an indefinite period on the basis that either party may end the arrangement on demand. The problem with such an arrangement, however, is that it gives no certainty to either party and may, inadvertently, become occupation for a particular period which may result in the tenancy becoming protected. Seeking to avoid protection by using a licence rather than a tenancy carries a similar risk in that the grant of exclusive possession for a term at a rent may be enough to give the occupier a protected tenancy.

In Javad v Aqil [1991] 1 All ER 243 the Court of Appeal held that where a prospective tenant is allowed into occupation while negotiations are taking place on the terms of a new lease, the parties will be taken to have intended a tenancy at will outside the Act rather than a periodic tenancy.

However, Javad v Aqil has been distinguished where tenants who had been in occupation of premises throughout the term of the previous underlease had remained in occupation and continued to pay the same quarterly rent. The Court of Appeal found that the occupiers had a quarterly periodic tenancy rather than a tenancy at will as there were no active negotiations for a new contracted out lease.