Landlord and tenant - the lease/licence test

Whether an occupier has a lease or a mere contractual licence is important. Licences do not usually bind third parties and do not benefit from the security of tenure provisions in the Landlord & Tenant Act 1954.

The traditional test for a lease is that the occupier has exclusive possession of the premises, for a fixed term, at a rent, although the last element need not always be present. The label which the parties put on the arrangement is not conclusive – the court will look at the substance of the relationship which has been created.

In Cameron Ltd v Rolls Royce PLC, the tenant had a lease which was contracted out of the Landlord & Tenant Act 1954. After that lease expired, it remained in occupation while negotiations for a new lease were taking place. Eventually an agreement for a new, contracted out lease was entered into. The agreement provided for the tenant to occupy the property as a licensee during the period between the date of the agreement and the lease itself being granted. Occupation was to be on the same terms as the new lease and the tenant was to pay a licence fee equivalent to the rent payable under that lease.

When the time came for the tenant to enter into the new lease, it refused to do so. It claimed that it already had a tenancy which had arisen under the interim arrangements in the agreement for lease, and that that tenancy was protected by the 1954 Act.

The judge looked at what the parties were trying to achieve when they entered into the agreement. He concluded that they could not have intended the grant of a tenancy, and particularly not one to which the 1954 Act applied. The original lease had been contracted out, and the parties had also gone through a contracting out procedure in relation to the new lease.

Following the seminal case in this area; Street v Mountford, the court held that there are instances where the three elements of exclusive possession, a term and a rent are consistent with a licence and only a licence. For example, where the right to exclusive possession can be explained on the basis of a legal relationship other than a tenancy. The court distinguished between instances where the purported licence is a stand alone arrangement, and those where the licence is merely part of a bigger picture.

In this case, the occupation was clearly referable to the agreement for the new tenancy. The position was no different from a buyer who went into occupation before completion pursuant to a contract to purchase the property. The agreement had created a licence, pending completion of the lease.

In any event, the landlord could have relied on section 28 of the 1954 Act. This provides that, where a landlord and tenant enter into an agreement for a new lease of the property from a future date, the current tenancy will cease to be protected by the Act.

Things to consider

Care should be taken when negotiating agreements which are intended to be mere licences. It is not enough simply to avoid using the terminology of "landlord" and "tenant". Nor will it necessarily be sufficient to include what is commonly known as a "lift and shift" clause, where the occupier can be relocated by the owner. Such clauses are designed to negate the grant of exclusive possession. However, if a court found that it was never intended that the relocation clause be operated, or that it would be overly difficult to relocate the tenant, it may still conclude that the agreement was a lease. Legal advice should always be sought to ensure that security of tenure is not inadvertently created.

This analysis was written by Sarah Allen, associate in Wragge & Co's Real Estate group.

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