Lease v Licence
Distinction
A lease is based on a contract between landlord and tenant but is a proprietary right, which may be enforced against their respective successors and creates rights to the land that hold good against all parties.
In contrast, a licence is a contractual right between a landowner and a land user. It is usually revocable. In some circumstances, licences may assume an irrevocable and quasi proprietary character.
The question of whether a particular arrangement in respect of land is a lease or licence is one of interpretation. Both a lease and licence are contractual in nature. The court interprets the documents in the context of the circumstances, in order to ascertain the parties’ intended meaning.
The payment of rent in return for the enjoyment of land is a feature of both leases and licences. The key characteristic of a lease is that the tenant has exclusive possession.
Consequences that Follow
Where there is a lease, a range of legal consequences follow, many of which cannot be excluded or varied, due to statutory provisions which may overrule any agreement to the contrary.
Licences being mere contracts are subject to the principle of freedom of contract. There is very little legislation that mandatorily requires certain consequences to follow or creates certain rights for parties.
The relationship is contractual and is generally terminable by the licensor. It may be terminated by it, notwithstanding that termination would cause a breach of contract.
Drawing the Line
The line between whether or not there is a licence or lease may be very thin. It involves a judgment of the entirety of the circumstances and the terms of the agreement.
The courts will look at the substance of the relationship as it is in fact implemented. This may be found to constitute the true agreement between the parties, irrespective of whether it is consistent with the terms of the agreement.
Designation by the Parties
An agreement or arrangement may be deemed to be a lease, notwithstanding that the parties have freely labelled it to be a licence, even if it is so intended. The courts have on many occasions, re-categorised arrangements that are labelled as licences, as leases.
In principle, an arrangement designated as a lease could be interpreted to be a licence, although will rarely arise in the circumstances. As with contractual interpretation generally, the court may interpret and determine the nature of the relationship, irrespective of the label employed.
Attempts have been made to avoid mandatory landlord and tenant legislation, by the designation of an arrangement as a licence. The agreement may provide for licence like obligations, which may not necessarily conform to the reality of the arrangement as it operates.
Common Forms of Licence
A lodger in a house is a classic example of a licence. Similarly, concession on the floor of a retail department store is the classic licence. Neither has the requisite exclusive possession or control of the area concerned, so as to be a tenant.
In Ireland, so-called conacre and agistment agreements have been commonly granted in relation to agricultural land. They had the advantage of avoiding certain former restrictions on letting agricultural land without the Land Commission’s consent.
The Land Commission has been wound up and this legislation no longer applies. Most of the remaining 19th Century statutory agricultural tenancy legislation was dis-applied in 1984.
Exclusive Possession
Where the agreement as it applies in the circumstances and in practice has the characteristics of a lease, including, in particular, the grant of exclusive possession in substance, then the court will hold it to be a lease.
Where possession is to be shared with the party granting it, the licensor, then this will negate exclusive possession, and preclude the existence of a lease or tenancy. Where on the true interpretation of the agreement, possession is to be shared between a number of parties, without exclusive possession of a particular party, there is unlikely to be a lease.
Not Always determinative
Some courts have taken the view that exclusive possession is not an absolutely determinative factor, particularly where parties have freely entered a commercial arrangement at arm’s length. Under this approach, greater weight is given to the parties’ designation.
The entirety of the circumstances, including the relationship of the parties, may lead to the conclusion that there is a licence only.
Even, where the licence holder is the sole key holder, where all the clauses are consistent with a licence, the court is more likely to uphold the party’s designation of the arrangement as a licence. In the context of a family or domestic arrangement, exclusive possession is more likely to be determinative of the matter.