Leases and Licences
Is the Agreement a Lease or a Licence?
Why Does the Distinction Matter?
There are two important difference between leases and licences:
- A lease is a property interest (except for Bruton leases). This means they can bind third parties. A licence, meanwhile, is merely a personal right and cannot bind third parties.
- Leases come with special obligations, called leasehold covenants. These obligations apply even if they are not stated in the express terms of the lease. A licence does not carry any special obligations.
The Objective Approach to Determining Whether there is a Lease
The key issue when distinguishing between a lease and a licence is whether the parties intended to create a lease or a licence. The parties’ intentions are assessed objectively: Antoniades v Villiers [1990] 1 AC 417. This is the case whether the agreement is residential or commercial: Rochester Poster Services Ltd v Dartford Borough Council (1991) 63 P & CR 88.
The objective approach means that the courts will look to the substance of the agreement rather than the way in which the parties have labelled it. It is therefore possible for an agreement to be a lease even if the agreement is labelled a ‘licence’ or if there is a term in the agreement expressly denying it is a lease.
The objective approach also means that any terms which were not ‘seriously intended’ and seem inserted just to trick the court into thinking the agreement is a licence will be ignored as a ‘sham’: Somma v Hazlehurst [1978] 1 WLR 1014.
A term is not a sham unless neither party seriously intends the term to give rise to genuine rights, however: National Westminster Bank v Jones [2001] 1 BCLC 98; Camelot Guardian Management Ltd v Khoo [2018] EWHC 2296.
The Requirements of a Lease
The court in Street v Mountford [1985] AC 809 identified three criteria for a lease:
A lease must grant the tenant the right to exclude everyone else, even the landowner. However, terms which allow the landlord to enter in limited circumstances (and keep the keys for those purposes), such as to make repairs or in emergencies, are not inconsistent with exclusive possession: Bruton v London and Quadrant Housing Trust [1999] 3 All ER 481.
The lease must be granted for a certain, or ascertainable, length of time. Both the start and end dates must be certain: Harvey v Pratt [1965] 1 WLR 1025. A certain length includes agreements that can be commenced or terminated by ascertainable events, such as notice: Swift v Macbean [1942] 1 KB 375.
While the court in Street thought rent was a key aspect of a lease, other cases have not enforced this requirement: Ashburn Anstalt v Arnold [1989] Ch 1. Other cases treat rent as merely one factor to consider when determining if the parties intended a lease rather than a licence: Colchester Council v Smith [1991] Ch 448.
It is also important to consider whether the parties intended to be legally bound by the agreement: Booker v Palmer [1942] 2 All ER 674 (CA). This is necessary for a lease, but not a licence (though it will be present for a contractual licence). Note that there is a rebuttable presumption against there being intention to be legally bound where the parties have a social or domestic relationship.
Showing that the tenant has been granted exclusive possession can be complicated.
Terms requiring the tenant to accept lodgers or share the land tend to show a lack of exclusive occupation: Westminster City Council v Clarke [1992] 2 AC 288. The exception is where the parties are in joint exclusive occupation (i.e. the lease is held by all occupants as a joint tenancy) or each have the right to exclusively occupy different parts of the land: Antoniades v Villiers [1988] 3 WLR 139.
If the landlord can enter the premises to provide ‘hotel-like’ services such as cleaning, this indicates that the tenant does not have exclusive possession: Crancour v De Silvaesa (1986) 52 P & CR 204.
If the tenant is required to occupy the land as part of their employment, this indicates a lack of exclusive possession: Smith v Seghill Overseers (1875) LR 10 QB 422. These are sometimes called ‘service occupancies’. If the tenant is not required to occupy the land, there can be a lease: Murray Bull & Co Ltd v Murray [1953] 1 QB 211.
What if the Landlord does not Own the Legal Estate?
If the landlord does not own or lease the land themselves, it is still possible for them to grant a valid lease: Bruton v London and Quadrant Housing Trust [1999] 3 All ER 481. These controversial leases are known as ‘Bruton leases’.
Bruton leases do not create a proprietary interest: only contractual interests. This means that they cannot be enforced against third parties. However, they let the tenant enforce leasehold covenants against the landlord.
Has there Been a Valid Grant?
Assuming the agreement is intended to be a lease, there must also be a valid form of grant. What counts as a valid grant of a lease depends on whether the agreement takes effect in law or equity.
Granting a Legal Lease
For a grant of a legal lease, the following requirements must be met:
- The grant of a new legal lease or sub-lease must be by deed: Law of Property Act 1925, s.52. Otherwise, it is void. There is an exception to this for leases taking effect in possession for less then three years for the best reasonably obtainable rent (s.54(2)) and periodic tenancies.
- The transfer of an existing legal lease must be by deed, with no exceptions: Crago v Julian [1992] 1 WLR 372.
- If the lease is a registrable disposition, the creation or transfer will be void unless it is registered.
Granting an Equitable Lease
An equitable lease arises if the landlord is under a specifically enforceable duty to grant the tenant a lease. This is usually a contractual duty: Walsh v Lonsdale (1882) LR 21 Ch D 9. However, the duty can be established in other ways, such as proprietary estoppel.
This is an application of the equitable maxim that equity will see as done what ought to be done.
Note that a person cannot be under a contractual obligation to grant a lease unless the contract is in writing and signed by both parties: Law of Property (Miscellaneous Provisions) Act 1989, s.2. Similarly, the transfer of an equitable lease must be in writing signed by the grantor: Law of Property Act 1925, s.53(1)(a).
