Take one licence…
A business college occupied various units in a building under a succession of licence agreements for around eight years (the last one was signed four years before the dispute arose). A dispute over service charge and other sums led ultimately to the owner changing the locks over the alleged arrears over a weekend, which resulted in court action to decide if it occupied as a licensee or tenant.
Licence or tenancy?
It is the reality of the situation – not the label – which determines this. To create a tenancy you need to assess that the occupier:
- controls its space - so can exclude others (and doesn’t share it with anyone else) - a discreet unit, for example;
- occupies for a period (no fixed term is necessary – it can be from month to month);
- pays a rent (but take care with this one – there are nuances);
- doesn’t occupy for any special reason (eg as a lodger or service occupier).
Indicators pointing towards a tenancy in the above case (the occupier wasn’t legally advised) included:
- units fitted out by the occupier (without consent but with the owner’s knowledge);
- the nature of the occupier’s business – unable to move quickly at no notice;
- the lack of any realistic intention/ability of the owner to exercise management control;
- levying a service charge;
- retaining the ability to terminate on 14 days’ notice on any breach of the occupier’s obligations.
Where both parties are of equal bargaining strength and legally advised, the courts may be less likely to intervene to “re-label” a licence as a tenancy; but why take the risk? No-one wants the debate when real estate due diligence is undertaken on the asset, whether by a funder, JV partner or potential buyer. Still less, the prospect of defending court action.
This court case is not the only instance where the lease/licence distinction has been under the microscope lately. And our knowledge of the market suggests an increased drive towards use of really short form contracted out lettings for higher churn/lower value assets, in particular, to negate risk.
Rather than risk being landed with a protected tenancy better to use a short form contracted out lease.