If exclusive possession at a rent for a term does not constitute a tenancy then the distinction between a contractual tenancy and a contractual licence of land becomes wholly unidentifiable” Lord Templeman in Street v Mountford [1985] AC 809.

St Andrews Forest Lodges Ltd against Jeremy Grieve and Iona Grieve [2017] SC DUN 25

This judgement is a useful reminder than even if both parties believe they are entering into a licence to occupy, they may in fact be entering into a lease. When could this happen? If the hallmarks of a lease are present (parties, property, rent and duration, as well as the “freshly-coined” element of exclusive possession), then the relevant contract will be construed as a lease, not a licence, which may mean that the occupant will have security of tenure. Security of tenure is not an issue with licences as licences can be brought to an end more easily than leases.

This case concerned whether the parties had entered into a holiday let (a mere licence to occupy) or a lease. The key issue focussed on whether, if it was a lease, was Mr and Mrs Grieve’s occupation of a lodge at Kincaple Farm in St Andrews protected by security of tenure through the Housing (Scotland) Act 1988, entitling them to remain in occupation.

The pursuers argued that the defenders had no right to occupy the holiday lodge because the agreement governing their occupation fell within the statutory exception under section 12(1) of the 1988 Act, being a holiday let (paragraph 8 of Schedule 4 of the 1988 Act) and was therefore not an assured tenancy.

What differentiates a licence to occupy and a lease can be negligible and the fine distinction can be where problems arise. A licence has been described as a contract which just falls short of a lease in that it only gives the licensee a "limited personal right and... no exclusive right of possession of any part... for any purpose whatever"[1]. The fifth essential element of a lease (in addition to parties, property, rent and duration), “exclusive possession”, was introduced as a concept fairly recently and has been argued to be the factor differentiating the two. It is already an essential element of leases under English law (Street v Mountford [1985] AC 809).

In the current case, it was decided that parties cannot simply ‘contract out’ of the 1988 Act and if all the essential elements of a lease are present then the court will construe the relevant contract to be a lease. The defenders were deemed to be tenants, not mere licensees. An important factor was also that none of the parties considered the defenders occupation to be for the purposes of a holiday let – they had lived there and used the property as a family home for 7 years and were only occupying it under such an arrangement until they could eventually purchase it (which didn’t happen for various reasons). The Sheriff court determined that it is the reality of the circumstances in which the parties find themselves that counts – not how they decide to categorise their agreement. Lord Templeman had provided an insightful comment in the previous Street v Mountford case on this point stating “the manufacture of a five pronged implement for manual digging results in a fork even if the manufacturer, unfamiliar with the English language, insists that he intended to make and has made a spade”.

Parties entering into licences need to be aware that in some circumstances these may be categorised as leases – to minimise this risk, careful drafting is needed, and even then a spade will be called a spade.