A need for care when licences are drawn up.

Byline: RICHARD FREEMAN WALLACE

GRANTING a licence can appear to be a quick, cheap and handy method of allowing somebody to occupy premises. However, such arrangements can be fraught with difficulties.

Licences need to be drawn up very carefully, otherwise they might be interpreted in law as a lease. The use of licences is a particular issue now as many property owners are keen to attract occupiers but potential occupiers are wary of signing up to lengthy leases. Occupiers are willing to sign, but only on an 'easy in, easy out' basis.

But what happens if the occupier's circumstances change and it wishes to remain in situ when the licence has run its course or the property owner eventually finds someone who is willing to make a longer term commitment. The property owner will want to eject the ''licensee''.

A licence is technically a "licence to occupy".

The business that occupies space under a licence does not have a tenancy and cannot therefore be described as a tenant. Nor does the occupier pay rent. Technically, the payment is a ''licence fee''.

If the licensee has exclusive occupation of the property, it will generally lead to the conclusion that a tenancy exists. That will give the tenant rights of security and make it more difficult for a landlord to recover possession.

A licence can properly be entered into where it is created as part of a larger transaction, involving a purchaser or new tenant occupying property before the freehold can be transferred across or a new lease granted. The Cameron v Rolls-Royce case of 2007 is a good illustration of the principle. Rolls-Royce occupied a property under two leases under which it had no security of tenure. When the leases expired, Rolls-Royce remained in occupation, while negotiations took place for new contracted-out leases, but paid no rent. Cameron and Rolls-Royce also entered into "licences" to cover the period from expiry of the old leases up to the time new leases would be granted. Rolls-Royce then refused to enter into the new leases, claiming that the licences were, in fact, leases.

The court rejected these arguments. It said that the licence had been granted only as part of the acquisition of a larger interest and had to be viewed only as a licence and not a lease. Rolls-Royce was obliged to take the new leases.

A licence needs to be drafted carefully so that it does not fall within the definition of a lease. If, as landlord, you are concerned that your proposed licence might in reality be a lease, it is better to grant a lease excluding the security of tenure provisions of the 1954 Act.

You can do this by applying to the court before the granting of the formal lease. It can guarantee a landlord's ability to recover the property at the end of the term.

Richard Freeman-Wallace is head of property at Watson Burton LLP