You say “Lease”, I say “Licence”, let’s call the whole thing off

You say “Lease”, I say “Licence”, let’s call the whole thing off

Exactly what you call a document does not matter as much as its substance and what has happened in practice.

The trademark features of a lease are:

•Exclusive possession.
•For a term (fixed or periodic).
•At a rent (although it is possible for a lease to arise without rent).

Recently, the High Court decided that the 5 owners of beach huts were periodic tenants. The huts had never moved so the landowner was excluded from the land underneath the huts for all intents and purposes. The beach hut owners were in exclusive occupation of that land and so a lease had been inadvertently created.

We frequently come across “licences” permitting storage units, equipment, racking etc to be located in situations which have extensive parallels to the beach huts. The “licence” may contain “lift and shift” provisions (which are usually included to pretend that there is no exclusive possession by the occupier) but it is rarely realistic to dismantle and move the units / equipment. The exclusive possession means that, whether you call the document a licence or a lease or something else entirely, that the “licence” is, in fact, a lease.

Another attempt to circumvent the reality has been to include a provision disallowing the use of the property for a certain amount of time each day. Again, when reality intervenes, the occupiers usually remain in occupation by storing items there or using it as normal during this prohibited period and therefore the “licence” will really be a “lease”.

Landlords are often trying to avoid the tenant’s rights under security of tenure provisions by using a “Licence” but it is not the only consideration. A further consideration for a landlord is Minimum Energy Efficiency Standards (MEES) regime, which prevents a landlord from granting a lease of a commercial property with lower than E as its EPC rating. Whilst true licences are not within the MEES regime, leases are caught. Defaulting landlords are hit with financial penalties.

In the context of a wider business relationship, building licences or licences to construct to developers are appealing. If the building licence turns out to qualify as a lease, the structure of the deal could trigger an SDLT liability and the works in question may form part of the chargeable consideration for SDLT calculation purposes. HMRC are starting to take an interest in situations which nudge the boundaries and are looking into whether, on the facts, the document is actually a licence or a lease.

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