The Distinction Between Leases and Licences

It is best to firstly explain what leases and licences are. There are two legal estates under the property act 1925 [2] , an estate in fee simple absolute in possession and a term of years absolute.

Tenure by a lease is an agreement that the tenant may enjoy exculsive possession for a specified period of time, also referred to as ‘term of years absolute’ [3] . The leaseholder may be designated as lessee, or termor [4] .

The leading authority for leases is Street v Mountford [5] , where the House of Lords laid down the test for distinguishing a lease, or tenancy, from a licence. The House of Lords held that where the arrangement in question was intended to create legal relations, and the occupier was granted a right to exclusive possession of the premises for a fixed or periodic term at a rent, then a lease or tenancy arises. Anything else is a licence.

A lease creates a legal estate, the phrase ‘term of years absolute’ could be seen as contradicted through the case of Bruton v London & Quadrant Housing Trust [6] . It was held by the House of Lords that the case was of a special nature, the decision and outcome will be considered in more detail further in the essay. But generally a legal lease will create a legal lease.

The Law of Property Act [7] require for a fixed term not an indefinite term. In Lace v Chantler [8] there was a lease for an uncertain term, ‘for the duration of the war’ was held not to be a lease as it was not for a fixed term. A specific period like ‘for 60 years’ is a clear term which satisfies the Law of Property Act. Therefore, all that is required is a fixed period , in Cottage Holiday Associates Ltd v Customs and Excise Commissioners [9] the courts accepted that the use of a holiday cottage for one week a year over an 80 year period was a legal lease.

In Street v Mountford Lord Templeman laid down three necessary components which needs to be present for a tenancy to exist. Theses are exclusive possession (meaning the right to the property excluding others even the landlord himself). However it should be noted that landlord can reserve the right to enter the premises (e.g. for repairs) during reasonable hours. Though in Appah v Parncliffe Investment Ltd [10] the landlord reserved the right to enter property when he chooses, this was held as a licence as the occupier did not have exclusive possession. In other words this indicates exclusive possession is not the only conclusive evidence for the existence of the lease. Secondly, a derterminate term [11] Thirdly, there must be a term less than the grantor [12]

The courts also held that any levels attached to the arrangements will be discounted and only the substance or reality of it will be considered. In Street v Mountford Lord Templeman appears to say rent is nessecary, however section 205(1)(xxvii) of the Law on Property Act 1925 talks about a term of years ‘whether or not at a rent’. Ashburn Anstalt v Arnold [13] , the Court of Appeal subsequently held in a more up to date case that the right to receive rent is not a necessary feature of a lease or tenancy. [14] This principle was further applied in National Car Parks Ltd v Trinity Development Co (Banbury) Ltd [15]

Bingham LJ expressed in Antoniades v Villiers [16]

“A cat does not become a dog because the parties have agreed to call it a dog”.

There has been many cases which following on from the decision in Street v Mountford many are concerned with the distinction between leases and licenses. In General many involve more than an application of the Street v Mountford principles [17] . Bruton v London & Quadrant Housing Trust, [18] has been a heavily criticized case in which the ‘House of Lords handed down … an undoubtedly significant and controversial decision’. [19] Leasehold is a proprietary right in land, the issue was whether a landlord and tenants relationship was allowed to arise even though the landlord did not own the freehold estate from which the leasehold came from.

House of Lords held that a tenancy had been created between the parties. Per Lord Hoffmann, a “lease”:

“… is not concerned with the question of whether the agreement creates an estate or other proprietary interest which may be binding upon third parties.” [20]

The agreement clearly gave exclusive possession. This goes to show that with regards to the homeless and to those who share accommodation, the right of exclusive possession presents difficulties.

Westminster City Council v. Clarke [21]  was referred to in Bruton, where the licence agreement was upheld as the council could change the accommodation without notice or require the occupant to share it with any other person. Moreover, the council was entitled to enter the accommodation at any time according to the terms of the agreement. Interestingly, Lord Templeman giving the leading speech in Clarke stress that this was “a very special case”, which was not to be viewed as allowing a landlord (private or public) to rid itself from the restrictions governing statutory security of tenure.

In Kay v Lambeth [22] K had occupied residential premises owned by B and originally licensed to a housing trust. Although they had originally been granted licences, they had become tenants of the trust when B had granted the trust a lease of the properties. B had then terminated the lease and sought possession of the properties on the basis that K were trespassers. K had argued that on the termination of the lease they had become tenants of B [23] , and alternatively a breach to his artice 8 rights [24]

Coincidentally, the same facts in Bruton were seen in Family Housing Association v Jones [25] . In this case the court of Appeal concluded that a license was in fact a tenancy as it had qualities of a tenancy as explained by lord Templeman in Street.

S. Murdoch [26] “argues that exclusive possession attaches only to an estate in land and this cannot be conferred by a grantor who does not himself have an estate except by the application of a doctrine of estoppels.” [27]

There has been cases which have involved no more than the application of the Street v Mountford principle,. It can be seen that the aftermath of Street v Mountford, illustrate that landlords will go to immense lengths to make it appear that the occupier did not have exclusive possession, [28] this could be to avoid the provision of the Rent acts. However Mackenzie and Phillips suggest that landlords go through great lengths ‘Even where there is no intention to avoid the Rent Acts [29] ’.

Many cases have also involved the courts deciding whether the written agreement represents the true relationship between the parties’ [30] .

Colbey R in his article [31] argues that

“Only once the House of Lords ruled in Street v Mountford, that exclusive occupation was the crucial factor did the law develop a degree of rationality”.

In Somma v Hazelhurst [32] , miss Somma (the landlady) created a licence agreement and reserved the right to share the accommodation with the occupiers or move in strangers to the property. This could be seen as she was specifically trying to ensure that the occupiers did not have exclusive possession. The courts looked at the parties intention to create a licence and not the reality of it. (Street v Mountford overruled Somma v Hazelhurst).

On the contrary, Colbey R also argues

“The Lord’s decision in Street still gave scope for landlords to avoid the legislation”.

In Aslan v Murphy [33] a licence was granted to the occupier, the landlord retained a key so that he could enter the property, the occupier was also require to share the basement property and be out of the accommodation for an hour and the half each day. The courts held that the clauses were unrealistic held there to be a lease not a licence. Not all clauses in the agreement will be viewed as unrealistic as in Westminster City Council v. Clarke.

Similarly in the case of AG Securities v Vaughn, Antoniades v Villiers [34] ,Antoniades. The Court of Appeal accepted that there was not a joint tenancy so they could not be deemed to have exclusive possession. The idea of joint tenancy was dismissed by Lord Templeman and Lord Bridge.

In Clear Channel UK Ltd v Manchester City Council [35] Etherton J questioned whether the company enjoyed a tenancy or tenancies protected by the Act, to answer this question he referred to Lord Templeman’s decision in Street v Mountford to determine whether the intention was to grant exclusive possession for a term at a rent.

In theory, a lease conveys a legal interest in land [36] and a license does not. In Thomas v Sorrell [37] it was held “A … licence properly passeth no interest, nor alters or transfer property in anything, but only makes an action lawful which without it had been unlawful.”

‘Exclusive possession used to be the trademark of a lease but more recently, the common law courts recognise that licenses of real property which include exclusive occupancy as a term to benefit the licensee, does not in itself convert the legal relationship into a lease. It is suggested that, if there is exclusive possession for a term and rent is paid, there is a presumption that the parties have entered into a tenancy agreement. [38] ’

Denning LJ referred to the judgment of Lord Greene MR in Booker v palmer [39] where, the circumstances and the conduct of the parties negatived any intention to enter into legal relationships. Denning LJ continued

‘We have had many instances lately of occupiers in exclusive possession who have been held to be not tenants, but only licensees… The result of all these cases is that, although a person who is let into exclusive possession is, prima facie, to be considered a tenant, nevertheless he will not be held to be so if the circumstances negative any intention to create a tenancy… Parties cannot turn a tenancy into a licence merely by calling it one.’

If the observations of Denning LJ are applied to the facts of the present case it may fairly be said that the circumstances negative any intention to create a mere licence. Words alone do not suffice. Parties cannot turn a tenancy into a licence merely by calling it one. The circumstances and the conduct of the parties show that what was intended was that the occupier should be granted exclusive possession at a rent for a term with a corresponding interest in the land which created a tenancy. [40]

The difference between a licence and a lease can become blurred.

Flowing from the principles articulated by the House of Lords in Street v Mountford 1 and affirmed in Bruton v London & Quadrant Housing Trust 2 would be that Miss A had an assured shorthold tenancy of the premises. “the courts are moving towards a major restructuring of landlord and tenant law along contractual lines” [41] “shadowy beginning of a changing schema in propety law” [42]

Sir John Vinelott did not in terms classify Ms Gray’s “appointment” as a form of “licence”, but it would seem that he did so classify it by implication when he invoked and approved the passage from Lord Denning M.R.’s judgment in Errington v Errington and Woods [43] 16 that was quoted above. For reasons that will become apparent below, we were concerned to establish that, if Miss A’s rights of occupancy were not derived from a tenancy, then they were at least rooted in a subspecies of licence rather than in some wholly distinct form of legal relationship. [44]