Lease or a Licence
Posted:5th June 2019
Lease or a Licence – Say what you mean and mean what you say.
The High Court decision in London College of Business Ltd v Tareem Ltd (2018) was a stark reminder that even where an agreement for occupation is called a licence a tenancy can be created by virtue of how the agreement operates in practice.
Background to the case
Part of Monteagle Court Barking was occupied by London College of Business Ltd (“the College”) owned by Tareem Limited. During 2013/ 2014 a dispute arose between the parties relating to the occupation and service charges amounts payable by the College. Tareem, believing the College to be in arrears, changed the locks excluding the College from the premises. A subsequent injunction required Tareem to surrender the keys; the College retook occupation but claimed for wrongful exclusion and damages.
Each occupation agreement clearly stated and repeated that it granted a licence only. Whether it did so was central to the dispute before the court because it was also relevant to the other considerations.
A licence to occupy grants the licensee only a personal contractual right to occupy a property, whereas a lease grants an exclusive interest in the land and potentially gives the tenant statutory protection.
Approach of the High Court
At the time of the College’s exclusion its occupation was governed by an agreement signed in 2012 (“the Agreement”).
The court explained its approach to interpreting that agreement and in deciding the legal basis of the college’s occupation as follows:
1. When interpreting any document the court’s objective is to establish the intention of the parties by reference to what a reasonable person having all the background knowledge available to the parties at that time would have understood them to be. The focus of the court was therefore on the meaning of the words used in the Agreement;
2. To determine whether an agreement creates a licence or a lease, it is necessary to determine whether exclusive possession is granted. This is critically important in considering whether an occupier is a tenant, but it is not necessarily determinative if there is an exceptional reason why an occupier should not be a tenant, for example if they are a lodger;
3. The parties are presumed to mean what they say in an agreement but that may be ignored if it does not reflect what happens in practice. Where an agreement has been negotiated between parties of equal bargaining strength with the benefit of legal advice, courts will often be reluctant to disregard the parties’ express statements as to the nature of the relationship created.
The court concluded that the Agreement granted a right of exclusive possession to the College and so it took effect as a tenancy for the following reasons:
1. Whilst the wording of the agreements was plain – the relationship created was that of licensor and licensee, the purpose of the agreement was to provide the College with premises from which it could run its business;
2. By the time the Agreement was signed, the College had fitted out its units. It was not realistic to believe that the parties genuinely intended that the College’s business could be interrupted by Tareem’s right of entry “for the purposes of exercising management and control”;
3. The parties did not have equal bargaining power. When the College first agreed terms it was not in a strong financial position so that it could negotiate the terms of the Agreement. When it came to renewal and all had been going well, the College had no concerns with continuing its terms of occupation;
4. The College fell into no exceptional category by which its exclusive occupation could be explained or excused as not constituting a tenancy.
The implication of the court’s decision was that the tenancy was a business tenancy subject to Part 2 of the Landlord and Tenant Act 1954.
The protection under the 1954 Act did not prevent the right of the landlord to re-enter and forfeit the tenancy. Indeed, the termination provisions of the Agreement permitted it if at that time the College was in arrears of rent and appropriate notice had been given.
The court’s determination on this point was that no valid notice had been given. Tareem was therefore in breach of the implied covenant for quiet enjoyment in the Agreement. As a result, damages were awarded to the College.
The significance of this case lies in the court’s re-iterating that the true nature of an occupational arrangement lies not in what it is called but in how it operates. If the arrangement grants an occupier exclusion possession then in all likelihood it grants a tenancy. This is not a new point of law but one that is worth repeating because of the complications that can follow.
Critically for any landlord in this situation, the protection afforded to a business tenant by Part 2 of the 1954 Act affords the tenant security of tenure. This makes it much harder for a landlord to regain possession of its property than if it had granted a lease and the parties had ‘contracted out’ of those protective provisions.