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16 January 2019

158: Lease or licence? It’s a question of fact

The High Court has held that a licence to occupy office space actually created a landlord and tenant relationship. When construed on the facts, the ‘licence’ gave rise to a lease under the Landlord and Tenant Act 1954 (1954 Act) giving the business occupier security of tenure and other important rights.

Facts

The London College of Business occupied office premises in Barking which was owned by Tareem Limited. The parties had over the years entered into a series of occupational agreements which stated that the College had a ‘licence’ ie a personal, contractual arrangement, which is different from a lease.

A dispute arose between the parties about licence payments and service charge. Tareem thought the College was in arrears so took action to exclude it from the premises by changing the locks. The College fought back by obtaining an injunction requiring Tareem to give back the keys. The College was able to take back occupation of the offices.

The College claimed wrongful exclusion and sought damages from Tareem. The High Court agreed and held that the College occupied under a ‘lease’ and not a licence. It looked at the intention of the parties, the meaning of the words in the original agreement and the factual background to the arrangement.

The key element in determining whether an arrangement is a lease, not a licence, is for the occupier to have ‘exclusive possession’ of premises ie the occupier can exercise the rights of the landlord and exclude anyone from the land, including the landlord itself.

Decision

The Court decided that College did have exclusive possession and the landlord’s right of entry reserved in the agreement ‘for the purposes of exercising… management and control’ was not realistic. The College had spent a lot of money in fitting out the units it occupied and the parties genuinely could not have intended that the College’s business would be interrupted by Tareem exercising its right of entry in this way.

The effect of this decision was that the College had a business lease with security of tenure under the 1954 Act which made it harder to end the lease arrangement.

Although Tareem as landlord had the right to re-enter the premises and forfeit the lease under this right of re-entry, Tareem needed to firstly serve a formal demand on the College setting out the amount of arrears of rent. As no valid notice was given, Tareem’s re-entry had been in breach of the covenant for quiet enjoyment in the agreement and the College was awarded damages for its loss.

This case is a useful reminder of a well-established legal principle that just because a document is called a ‘licence’ it may not actually be a licence, if the parties are acting in practice as if it is a lease. Rights of occupation should only be granted under careful consideration by landowners as to whether they are, in practice, giving the occupier exclusive possession of the premises.

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