Owners of commercial property often find that they want to allow someone into occupation without the time and expense of negotiating a lease. There is a tendency in these situations to just allow the occupation on an informal basis, not involving lawyers or thinking too much about the nature of the occupation. This is fine while the parties are aligned in what they are trying to achieve; however, all too often the landlord will decide that he wants the property back while the occupier wants to stay, and this is when problems arise. It is always advisable to spend a little time and money at the outset making sure that the relationship is properly documented, rather than spending a lot of time and money sorting it out later.
This briefing note explains the types of occupation, looks at which is suitable in different circumstances and considers the implications of each of them. The issues are most likely to arise when someone is allowed to take occupation, or remain in occupation, in the following situations:
- When the terms of a formal lease are being finalised.
- When an agreement for lease has been entered into, pending grant of the lease (for example, to carry out works).
- At the end of the fixed term of a lease which has expired.
- When the property is only needed for a very short time, so the cost of drawing up a detailed lease cannot be justified.
What are the options?
There are various different ways in which a property may be legally occupied, but these four are the ones you are most likely to come across:
- A lease: This gives the occupier a legal interest in the property, for a specified term, in return for the payment of rent. Subject to the terms of the lease, he can use and deal with the property as if he were the owner of it. A fixed term lease must be in writing and if it is for a term of more than three years it must be made by deed.
- A periodic tenancy: This is a particular type of lease that may be a written but that most often arises automatically when a landlord allows a tenant into occupation without any kind of documentation. The “period” refers to the amount of notice that either party must give to the other in order to bring it to an end and (in the absence of a written agreement) is worked out by reference to the period for which rent is paid.
- A tenancy at will: This is also a sort of lease, but a very unusual one as it is personal to the parties and either party may immediately bring it to an end at any time.
- An occupational licence: This is a personal arrangement which allows an occupier to use the property in a particular way.
How do we know what type of arrangement we need?
It is important to be aware that the name you give to a document doesn’t determine its legal nature. Just because you write “licence” or “tenancy at will” on the front of a document, this won’t be what you have if the document itself grants exclusive possession, for a fixed term, at a rent. It is essential that you understand what you are in fact entering into.
Does the occupier need exclusive possession?
The first question is whether or not the occupier will need exclusive possession of the property. If the occupier has exclusive possession he cannot have a licence (it doesn’t matter if the arrangement has been called a licence – it legally isn’t one). However, he may have a lease, a periodic tenancy or a tenancy at will.
Exclusive possession essentially means that the occupier is able to use the property at the exclusion of the landlord and third parties. If an occupier has the keys and can use the property whenever he wishes, and the owner has agreed that he will not access the property, or allow anyone else to access it (other than, for example, to carry out works or inspect), the occupier will almost certainly have exclusive possession. However, if the occupier is only allowed access to the property at certain times (perhaps because it’s used by someone else outside these times), or the owner is also allowed to use the same property whenever he pleases, or has the right to move the occupier to some other premises, there is no exclusive possession.
Examples of when a licence (with no exclusive possession) may be suitable include: a concessionaire being given the right to operate a concession within a larger shop; an occupier having office-hours access to a serviced office space; and the future tenant under an agreement for lease accessing the property to carry out works while the landlord is completing works of his own. A licence should never be used where the occupier will have exclusive possession.
Does the occupier need the property for a specified period?
Where the occupier requires the property for a pre-fixed term, a lease will be the most suitable arrangement. Where there is a maximum agreed term but greater flexibility is needed, the lease can include a rolling break which allows the tenant (and/or landlord) to terminate early.
A tenancy at will is only a true tenancy at will if either party is able to terminate it at any time. This means that the landlord can immediately ask the tenant to vacate (in which case the tenant will have a reasonable time in which to remove his goods) and the tenant can simply move out at any time. If the parties need greater certainty than this, a tenancy at will is not a suitable arrangement. A periodic tenancy gives greater comfort because of the notice that must be given, though it still allows the lease to be brought to an end at any time; the only difference is that the tenant doesn’t have to vacate straight away.
As a licence is simply a contractual arrangement, it may be for a fixed term and may include an agreement with regards to notice for early termination. However, a fixed term is one of the factors that point towards an arrangement being a lease, so some care should be taken with this.
Does the arrangement need to remain binding if the landlord sells his interest?
Not every type of arrangement survives if the owner of the property sells his interest. If this is a concern to the occupier it will have a bearing on the type of interest that is created.
Leases and periodic tenancies will both survive the transfer of the landlord’s interest (provided that they have been correctly registered where this is required). The new owner of the property will take the property subject to the tenant’s interest in it.
A tenancy at will is purely personal: it exists only at the will of the landlord, so if he ceases to be the landlord it will simply fall away. This applies not only when he sells his interest, but also if his interest transfers involuntarily (for example on liquidation or bankruptcy). The new landlord may be willing to create a new tenancy at will but there is no guarantee of this. However, as by its very nature the tenancy is vulnerable to be terminated at any time anyway, if an occupier is happy to take a tenancy at will this shouldn’t be a major concern.
A licence is less certain but, as it is a personal interest, it is unlikely that it will be binding on the owner’s successors in title. This is the case even if the licence expressly states that it will be binding, and even if the successor in title has notice of the licence arrangement. The only circumstances in which it will bind the successor are where the successor has done something which would make it very unfair for it not to bind (for example, where the successor has assured the occupier that the arrangement will continue and the occupier has incurred expense, or given up other premises, based on this assurance).
What are the implications of the different types of arrangement?
Once you have established as a matter of law the type of arrangement that you wish to enter into, there are various implications that you need to be aware of.
Will the occupier get security of tenure?
Security of tenure is the right of a business tenant to remain in occupation, and to be granted a new lease, when his current lease comes to an end. It can be a very useful mechanism if used correctly, but can give a property owner a nasty surprise if he discovers that his occupier (who he thought was just a licensee) has gained security of tenure and doesn’t have to leave.
Neither a true licence nor a true tenancy at will attract security of tenure. Provided that the arrangement genuinely falls into one of these categories there is no risk that the occupier will gain these rights.
A periodic tenancy always attracts security of tenure and it is not possible to contract out of this. Because of this, periodic tenancies are rarely used intentionally (unless the landlord is happy for the tenant to obtain security): they tend to arise only when the parties simply haven’t documented the arrangement. This is one of the main reasons why a property owner needs to take great care in ensuring that a periodic tenancy isn’t allowed to arise.
A fixed term lease will attract security of tenure unless it has been properly contracted out or it is granted for a term of less than six months. However, caution needs to be exercised with the “less than six months” rule: a lease of less than six months will still attract security of tenure if includes a right to renew beyond the six months or if the tenant (or the predecessor in title to his business) has been in occupation for a period exceeding 12 months.
Will stamp duty land tax be payable?
There is no stamp duty land tax payable for a genuine licence or tenancy at will. For a short term lease it is unlikely that any stamp duty land tax will be payable, as it will probably fall below the threshold. However, this will always need to be checked, with a return and payment being made within 30 days of lease grant where required. We wouldn’t recommend that a periodic tenancy be used intentionally, but if one does arise then stamp duty land tax may be, or later become, payable, depending on the level of rent.
You should also be aware that where a licence is being granted to allow occupation pursuant to an agreement for lease, this is likely to amount to substantive performance and will also trigger the need for payment of stamp duty land tax.
How much will it cost?
A licence is generally the quickest, cheapest form of document to draw up, but the speed and cost needs to be balanced against the risks associated with allowing occupation under licence.
A tenancy at will is also very quick and easy to put in place: it closely resembles a licence in content and detail, the key differences being that it gives exclusive possession and that no notice period for termination can be included.
A short-form fixed term lease is more detailed and will require a little more thought, but for a lease of less than six months where there has been no prior occupation it shouldn’t be significantly more costly or time consuming than a licence or tenancy at will. However, where a lease is being granted following a prior period of occupation, and security of tenure needs to be avoided, there will be the additional time and expense associated with the notice and declaration process to contract it out. If stamp duty land tax is payable this will also add to the time and cost.
We wouldn’t recommend that a periodic tenancy be used intentionally.
What happens if we have no documentation?
If someone is allowed into occupation of the property without any documentation in place then either a lease, a licence or a tenancy at will arises automatically. Which one it is depends on the particular facts, and is based on the various points discussed above. Where the occupier doesn’t have exclusive possession it is likely to be a licence; where exclusive possession has been given it will be either a tenancy at will or a periodic tenancy. This can only be determined by looking at what the parties had agreed between them.
Where the occupation is clearly in anticipation of a formal lease being granted, and the negotiations for this are progressing, the occupier will usually be held to have a tenancy at will. However, where a landlord demands and accepts rent but there are no on-going negotiations for a new lease – including a situation where negotiations were initiated but have subsequently broken down – the tenancy is likely to be, or become, a periodic tenancy. The more time that goes by after the lease comes to an end, the more likely it is that a periodic tenancy will have arisen.
We would always advise both owners and occupiers of property to enter into formal, legally binding arrangements that properly suit their requirements. A failure to do so can prove very costly for both parties: a landlord may find that he is stuck with a tenant who has gained security of tenure while a tenant may suddenly find that he is asked to leave after incurring expense in respect of the property, or that has to continue paying rent when he thought he could just leave. Careful through should always be given to the true nature of any occupational arrangement.