22 June 2018

Lease or licence? The issue that just won't go away...

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

Summary

The High Court has reaffirmed the law concerning the identification and classification of a lease in a claim concerning commercial premises operated as a college in Barking, Essex. The law provides significant protections for those holding an estate in land and there are clear advantages for a tenant to hold a lease, rather than settle for being a mere licensee. In the circumstances, the Courts will look to the substance of so called "licences to occupy" before simply accepting the labelling. Where an occupier is granted exclusive possession of premises, with the right to exclude the property owner, it is highly likely that the agreement will be construed as a lease. The Courts have recently shown some reluctance in intervening with such matters, particularly where parties take advice and have equal bargaining power, but disguising a lease as a licence remains a risky strategy for a property owner to adopt.

The facts

Pursuant to various agreements in substantially similar terms, the Claimant (the "College") had occupied parts of an office building owned by the First Defendant (the "Owner") since 2006. The most recent of these agreements was completed on 22 June 2012 and was labelled "Licence Agreement", with the respective parties referred to as "Licensor" and "Licensee". Various terms purported to support the notion that the agreement was a licence rather than a lease, including the following:

the agreement reserved a right of entry for the owner to effect works or for "any other purposes deemed necessary by the Licensor";
the agreement stated that it "merely" conferred a "personal privilege to use the premises"; and
an express term was included, stating that the agreement would "not be deemed to constitute a tenancy within the meaning of the Landlord and Tenant Act 1954".

The agreement also contained a term entitling the Owner to serve notice to terminate it if the College fell into arrears. It was pursuant to this term that on Sunday 21 September 2014, the Owner purported to end the agreement by re-entering the premises, changing the locks and excluding the Claimant from the premises. The Claimant obtained an injunction enabling it to reopen after being locked out for three days, but it claimed that it had suffered significant loss of profit and damage to its goodwill.

Various issues were raised at Court, including the owner's right to re-enter, the sum of the arrears and the extent of any damages due to the College. These issues were largely decided based on the relevant facts of the case. In our view, the most significant point in dispute concerned whether the "Licence Agreement" was in fact a licence or a lease.

The applicable law

The landmark case of Street v Mountford [1985] UKHL 4 established that a lease would be characterised by the grant of exclusive possession of a property, for a term and at a rent. However, given that a term can sometimes be implied and that a rent may be a peppercorn, the hallmark of a lease is exclusive possession. In Street v Mountford the Court described this as follows: "The tenant possessing exclusive possession is able to exercise the rights of an owner of land, which is in the real sense his land albeit temporarily and subject to certain restrictions."

The subsequent decision in Addiscombe Garden Estates v Crabbe [1958] 1 Q.B. 513 also established that the whole agreement must be examined and that any agreement giving rise to the rights and obligations of landlord and tenant would be treated as such. In other words, the Court will give a lease its true effect, even if it is labelled a licence.

The Court's recent practice has been to avoid intervening where parties have negotiated commercial terms from positions of equal bargaining power and with professional advice, but where such a point falls to be decided, there is no guarantee that careful labelling in an agreement will avoid the Court's scrutiny.

The decision

The Court held that the 2012 "Licence Agreement" was in fact a lease. Despite very clear language in the document itself, several factors supported a finding that exclusive possession had been granted:

the College had fitted out the premises at its own expense without licence from the Owner and the Owner was well aware of this;
it was unrealistic to imagine that the Owner would truly have the right to interrupt the College's business by exercising a purported right to enter the premises;
the clear intention of the Owner was to allow the College to run its business at the premises, provided that it was paid the stipulated sum;
in reality, neither the Owner nor its managing agent had ever sought to exercise the right of entry apparently conferred by any of the agreements dating back to 2006;
any meetings on site had been arranged in advance, not as a matter of courtesy, but because the Owner did not have an unfettered right of entry.

Finally, the Court also accepted evidence supporting the College's contention that it had not enjoyed equal bargaining power with the Owner. The College had been in a weak financial position at the outset and had not been able to negotiate the terms of the agreement.

Our comment

33 years after the landmark case of Street v Mountford, it is clear that the age old practice of labelling a lease as a "licence" is still continuing. This may seem like a convenient way to avoid the security of tenure provisions in the Landlord and Tenant Act 1954, but in our experience taking this type of short cut can lead to problems for both parties. Even if landlords are able to convince occupiers to agree to be "licensees", buyers of their interest may not be prepared to accept the uncertainty of such an arrangement. Occupiers clearly have more to gain if the agreement is construed as a lease, but even this may lead to trouble. For example, if a "licence" is found to be a sublease, where the "licensor" had covenanted with its landlord not to sublet, the landlord may succeed in forfeiting the head lease and terminating the sublease. It will almost always be best to have legal certainty from the outset.

Edward Cooper