A Quick Guide to Commercial Landlord Letting

Landlord Options to Let

When it comes to commercial landlord letting, often landlords want to let them on a temporary basis without being locked into long-term arrangements. The 3 principal ways in which landlords can achieve this are:

Lease
License
Tenancy-at-will

The lease

Basically put, a lease gives the lessee exclusive rights to the land for a specified time, which is stipulated in the contract. This temporary legal title to the land gives the lessee the right to exclude all others, even the landlord, if they choose to.

In contrast to the lease holder’s rights of exclusion, a license does not give the tenant holder this right to exclude the landlord; it only allows the right to occupy. With the granting of a license, it’s in the interest of the landlord to ensure that this is in fact the case, lest the landlord may create a tenancy by default.

Subject to the terms of the lease agreement, the tenant has exclusive possession of the property; this allows the tenant to enjoy the rights as if they were the owner of the land, albeit a temporary owner. With this temporary ownership comes the concomitant responsibilities that come with ownership, such as insurance, health and safety, internal repairs and maintenance, etc.

The license

One advantage that the license offers, to both the landlord and tenant, is the flexibility it can afford in shaping the agreement. A good example of this flexibility can be where the tenant is unsure about their future prospects, such as a startup business, and they do not want to commit to a long-term lease agreement. It’s difficult for new businesses to foresee how their business will develop in the short and mid term, and it is therefore difficult to predict what premises or resources they will need. Indeed, in a very short time, they may discover that they have outgrown their premises and will require more floor space. In such situations, licenses are a good option and are mainly used for commercial settings, and not residential ones, except perhaps where the landlord lives with the tenant as a lodger.

As you may have discerned, the important distinction between the license and tenancy is the exclusive possession and control, whereby the tenant can exclude all others, including the landlord.

If there is uncertainty as to whether a tenancy or license is governing the relationship, despite the wording of the agreement, the courts will look at the de facto situation as to which one exists, as held by the House of Lords decision in Street v Mountford. For example, where the landlord can exercise any control, such as providing cleaning services, and where the tenant can not exclude all others, then the court will likely find a license exists.

For commercial settings, the situation is much clearer as set out above. In residential settings, however, the situation is not so clear. This is to do with situations where the landlord lives in the building but does not share facilities with the tenant (“occupier with basic protection”).

Where the landlord faces breach of the terms of the contract, in terms of a commercial tenancy, the landlord can resort to forfeiture, for both a license and lease. Because this amounts to locking out the tenant, it’s best that the landlord seek legal advice before carrying this out.

The license is cheaper than a tenancy agreement because it is relatively simple to draft and doesn’t need a solicitor to prepare each time. Licenses cover a short period of time, often up to six months, but leases cover multiple years and come with numerous onerous conditions.

The tenancy-at-will

A tenancy-at-will is short and flexible and can be terminated by either party at any time. One of the uses this tenancy agreement has, which is more akin to a license than a tenancy, is an interim tenancy agreement that gives time for the parties to negotiate a longer-term lease.

This type of tenancy agreement is not used in residential settings but only in commercial settings. It’s important that a license or tenancy-at-will is drafted carefully to protect the legal rights of both parties, with any ambiguity potentially causing issues down the line. One such pitfall of a badly drafted agreement is granting security of tenure to the occupier by creating a periodic tenancy, as held in the case of Javad v Aquil [1991].

There are also financial implications to consider with the different types of tenancies available. Leases will incur Stamp Duty Land Tax payments, but this is not applicable to both the license and tenancy-at-will.

One other lease worth briefly mentioning is the lease that involves letting outside the Landlord and Tenant Act. This Act ordinarily gives security of tenure for business tenants and a right to renew, whether the landlord agrees to it or not. However, the landlord can bypass this statutory right to security of tenure by advancing a special warning notice to the tenant. This must be done at least 14 days before the agreement is signed, to give the tenant enough time to seek legal advice.