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Say what you mean - lease or licence?

The High Court has held that an agreement for occupation, despite being called a licence, actually created a tenancy and so the occupier had acquired rights under the Landlord and Tenant Act 1954.

Facts

In London College of Business Ltd v Tareem Ltd, part of Monteagle Court, Barking was occupied by London College of Business Ltd. Monteagle Court, itself, was owned by Tareem Ltd.
In 2013 and 2014, a dispute arose between the parties about the amounts payable by the college in respect of its occupation and service charges. Tareem, believing the college to be in arrears, changed the locks and excluded the college from the premises. A subsequent injunction required Tareem to surrender the keys and the college retook occupation but claimed for wrongful exclusion and damages.

The college's occupation had been governed by a succession of agreements. Each stated clearly and repeatedly that it granted a licence only. Whether it did so was central to the dispute before the court, because it was relevant to the other considerations. A licence to occupy grants the licensee only a personal contractual right to occupy a property, whereas a lease creates a proprietory right and potentially gives the tenant statutory protection.

Approach of the court

At the time of the college's exclusion, its occupation was governed by an agreement signed in 2012.

The court explained its approach to interpreting that agreement and in deciding the legal basis of the college's occupation:

  • When construing any document, the court's objective is to establish the intention of the parties by reference to what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be. The focus of the court was on the meaning of the words used in the 2012 agreement in their factual, documentary and commercial context;
  • In order to determine whether an arrangement creates a licence or a lease, it is necessary to determine whether exclusive possession is granted. This is critically important in considering whether an occupier is a tenant, but it is not necessarily determinative if there is an exceptional reason why an occupier should not be a tenant, for example if they are a lodger;
  • The parties are assumed to mean what they say in an agreement, but that may be ignored if it does not reflect what happens in practice. Where an agreement has been negotiated between parties of equal bargaining strength with the benefit of legal advice, the court will often be reluctant to disregard the parties' express statements as to the nature of the relationship created.

Decision

The court concluded that the 2012 agreement conferred a right of exclusive possession on the college and so it took effect as a tenancy, for the following reasons:

  • The wording of the agreements was plain, that the relationship created was that of licensor and licensee;
  • However, the purpose of the agreement was to provide the college with premises from which it could run its business. By the time the 2012 agreement was signed, the college had fitted out the units it occupied and the court said it was not realistic to suppose that the parties genuinely intended that the college's business could be interrupted by Tareem's right of entry 'for the purposes of exercising . management and control' (as provided for by the agreement);
  • The parties did not have equal bargaining power. When the college first negotiated terms, it was not in a strong financial position such that it could argue about the terms of agreement, and when it came to renewal and all had been going well, the college was relaxed about continuing its terms of occupation;
  • The college fell into no exceptional category by which its exclusive occupation could be explained or excused as not constituting a tenancy.

The implication of the court's decision was that the tenancy was a business tenancy subject to the provisions of Part 2 of the Landlord and Tenant Act 1954.

The protection of Part 2 of the 1954 Act did not preclude the right of the landlord to re-enter and forfeit the tenancy. Indeed, the termination provisions of the agreement permitted it to do, if at that time the college was in arrears of rent and appropriate notice had been given.

The court's determination on this point was that no valid notice had been given and so Tareem was in breach of the implied covenant for quiet enjoyment in the agreement. As a result, damages were awarded to the college.

Conclusion

The main interest of this case lies in the court's re-iterating that the true nature of an occupational arrangement lies not in what it is called but in how it operates. If the arrangement grants an occupier exclusion possession, then in all likelihood it grants a tenancy. This is not a new point of law but one that is worth repeating because of the complications that can ensue.

Critically for any landlord in this situation, the protection afforded to a business tenant by Part 2 of the 1954 Act affords the tenant security of tenure. This makes it much harder for a landlord to regain possession of its property than if it had granted a lease and the parties had 'contracted out' of those protective provisions.

Any property owner should consider carefully the legal basis upon which it allows another into occupation to ensure that its investment aims are met.

London College of Business Ltd v Tareem Ltd [2018] EWHC 437 (Ch)

Disclaimer

This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

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