Short Term Lets of Commercial Premises: Lease, Licence or Tenancy at Will
by Kate McCormick
This is our guide to the different types of short term commercial letting agreements, explaining when to use each type of agreement and the advantages of one agreement over the other depending on your specific letting requirements.
It is very common for commercial property to be let on a short term basis. When a landlord intends to let commercial property on a short term or relatively informal basis they may not want to put in place a longer and more formal commercial lease agreement. This guide examines when each of the three main types of commercial property tenancy agreements should be considered and highlights the differences between the different types of commercial property tenancy agreement. Read this guide to get an understanding of the different agreements for letting property to ensure that the most appropriate agreement is used when it comes to letting your commercial property.
The Types of Short Term Property Agreements
Commercial Lease Agreement
A Commercial Lease Agreement is suitable for leasing commercial property for periods of at least 6 months and up to seven years. Although for long term agreements which is anything over 3 years a very detailed Solicitor reviewed contract should be used given the long term nature of the agreement that will be created. A key distinguishing element of a lease is that it grants exclusive possession upon the tenant. That means that the Landlord cannot enter except in certain prescribed circumstances that will be detailed in the lease. This means that, subject to any rights reserved to the landlord, the tenant can exclude anyone else from the property and can exercise all the rights of the owner in respect of the lease. E.g. allowing a sub tenant to occupy the premises under a Sublease Agreement. Leases are often used for letting out shops, warehouse space or offices to businesses. A lease is a contractual obligation but it also creates an interest in property. It must therefore be granted for a distinct period of time but can roll on beyond the fixed term detailed in the contract. In such circumstances it will become a Tenancy at Will and will then be terminable by notice. This notice will be the period of notice detailed in the lease and where nothing is said in the lease it will be a period that equates to the frequency of payment of the rent under the agreement. Thsi is usually going to be monthly.
Licence to Occupy
A licence to occupy is far shorter and more simple type of commercial tenancy agreement when compared to the commercial lease agreement discussed above. This type of tenancy does not does not create an interest in the property and so the tenant will have to accept that the Landlord can themselves enter the property at any time. The agreement can also be drafted to state that the landlord can use the property at the same time as the tenant. The licence to occupy is very popular where a short fixed term tenancy agreement is required. The Licence to Occupy Agreement is ideal for letting commercial property for periods of 6 months or less.
Tenancy at Will
A tenancy at will is a flexible type of letting agreement that is often used for short term commercial property letting. The tenancy at will agreement is however indefinite and continues until the one of the parties gives notice to the other to bring the tenancy to an end. This can be commercially risky if you need certainty that the tenant will remain in occupation (and therefore you will be recieving rent) for a minimum period of time. As the Landlord you can customise a Tenancy at Will template so that notice that suits you is required to be given by the tenant. The notice could be a long period if that suits but is commonly a period of between 1 and 6 months. The agreement does create exclusive possession which often makes it preferable to a tenant compared to a Licence to Occupy. A tenancy at will is automatically terminated by a transfer of the landlord’s interest, by the death of either party or where a new tenancy is granted. A tenancy at will can be made expressly but often arises by implication, for example where a tenant is permitted to continue in possession after a lease has expired.
Periodic Tenancy Agreement
A periodic tenancy is the term given to a tenancy agreement that continues for fixed intervals until terminated by either the Landlord or the Tenant giving notice. This type of agreement is sometimes used for letting commercial property but is more commonly used for letting residential property. The ‘period’ depends upon how frequent rent is paid under the agreement. A template periodic tenancy agreement can be found in our Tenancy Agreement template section. If rent is paid weekly then the period tenancy is a week to week tenancy. If the rent is paid monthly then it shall be a month to month tenancy and one month's notice would need to be given to terminate the tenancy. When granting a tenancy at will, care should be taken to avoid inadvertently creating a periodic tenancy as this often necessitates longer notice periods as at least one period of the tenancy will have to be given as 'notice'. You also need to be careful subject to the 1954 Act (see below). Factors that could lead to a periodic tenancy arising include the tenant being in occupation and paying rent for a lengthy period or the terms having been agreed ‘subject to contract or lease’. They could also be negotiations ending without a formal lease resulting and the landlord not seeming to care about the tenant acquiring statutory protection.
Practical Implications of Using the Different Types of Agreement
As a lease is an interest in property, it is binding on successors in title and third parties. This means that if the landlord sells his interest, the lease will continue and bind the purchaser. A licence or tenancy at will, however, will not bind a purchaser unless the court imposes a type of trust as a result of the grantor’s inappropriate conduct.
Stamp Duty Land Tax
Stamp Duty Land Tax (SDLT) may be payable upon the grant of a lease. Tenancies at will and licences are exempt. Care should be taken though where there is also an Agreement for Lease, as occupation under a licence or otherwise will make this substantially performed, giving rise to a charge.
Renewal - Landlord and Tenant Act 1954
Part II of this Act confers (subject to certain exceptions) ‘security of tenure’ on a tenant who occupies premises for the purposes of a business. This means that the lease will automatically continue at the end of the contract on the same terms and the tenant can then apply to court for a statutory renewal of the tenancy.
Fixed term tenancies for less than six months are excluded unless they contain provision for renewing them beyond six months or the tenant (the business) has been in occupation for greater than twelve months (but not as a tenant at will). This means that a landlord could perhaps grant up to three tenancies of just under six months as long as the tenant has not been in occupation for a year when the third lease is actually granted. Service tenancies, mining leases, agricultural tenancies and tenancies of premises licensed to sell alcohol granted before 11 July 1989 are also excluded.
A tenant may contract out of security of tenure by signing a formal agreement before the tenancy is granted and the tenant enters into occupation. If security of tenure applies and the tenant does not contract out, the landlord may only terminate the tenancy if s/he proves one or more of the statutory grounds for opposing a new tenancy and there are strict time limits for doing so. Therefore, the Act has serious implications for a landlord unaware of its provisions and legal advice should always be sought.
Unlike leases, licences and tenancies at will are not business tenancies for the purposes of the Act so confer no right to renew at the end of the term (although periodic tenancies are).
Provided that all parties are well informed and the landlord has negotiated that the tenant contract out of security of tenure if required, leases can offer a secure period of income for a landlord and security and certainty for a tenant. A ‘contracted out’ lease can be especially useful in times of recession when the parties are uncertain as to how long the business will survive but want some security of rent or occupation for a fixed period. Leases are, however, the most lengthy and costly option to prepare and may well result in an SDLT charge.
Licences do not offer the same security and provide less control over the property for the licensee, although the licensor will usually have to provide notice to terminate. They are most appropriate for uses such as a holiday letting, lock up garage, short term serviced office space, occupation of land for leisure or for occupation or carrying out works between exchange and completion of a sale or lease. It is wise for a prospective landlord to have a licence dealing with the latter cases drawn up, as the second edition of the Standard Commercial Property Conditions (which contain default provisions for the contract), make no provision for such occupation. The licence document is shorter and cheaper than a lease and will not usually attract SDLT. A licence will permit a landlord to retain a greater degree of control over the property.
Tenancies at will are more risky and offer no security for either party but a landlord may desire their ease of termination for a very short term, transitional arrangement. They are usually very restrictive on the tenant but will confer exclusive possession. Again the document is cheaper and simpler than a lease and does not attract SDLT.
Drafting Issues to Consider
Once you have decided which type of agreement is most appropriate, it is not so simple as just calling an agreement a ‘lease’ or ‘licence’ or ‘tenancy at will’. Nor is it even reliable to just insert general clauses that are usually found in each type of agreement, respectively. Instead, should a dispute arise, the court will examine the substance of the whole agreement and the entire rights, obligations and intentions of each of the parties, as they manifest in practice. The courts are very astute to landlords dressing up what is in fact a lease as a licence, to avoid the above implications.
There are, however, various factors that will point towards a certain type of agreement. Most of these serve to indicate whether or not there is, in fact, exclusive possession.
For a lease, such factors include:
• A covenant for quiet enjoyment;
• A forfeiture clause;
• Clauses defining a specific premises or area of occupation;
• Clauses reserving rights of entry or inspection or rights of way to the owner;
• Clauses prohibiting or restricting assignment or underletting;
• Clauses granting a fixed or periodic term for a definite rent;
• The rent being exclusive of services or other property outgoings.
Even where exclusive possession, fixed rent and a definite term are present, there are still exceptions, where the agreement will nevertheless be a licence, rather than a lease:
• When the parties did not intend to enter into a legal relationship at all e.g. where the occupation is based on charity or friendship (i.e. community centres);
• For service occupancies;
• For occupancy by virtue of an office;
• Where the grantor had no power to grant a tenancy.
Factors pointing towards a licence could be:
• The absence of a convenant for quiet enjoyment;
• A clause preserving the owner’s right to possession and control of the premises and the way the licensee uses them e.g. physical layout (simply reserving a right of way for the owner may not be sufficient);
• Clauses permitting the owner to oblige the licensee to move to different premises;
• A short term of less than six months;
• No fixed or definite term;
• Clauses limiting the licensee’s occupation to certain hours or times (regardless of whether portable equipment is left on the property);
• The inclusion of services within the licence fee (e.g. care homes);
• The inclusion of furniture, fixtures and fittings.
A tenancy at will is indicated by there being:
• No fixed or definite term;
• A clause permitting the landlord and tenant to terminate on immediate notice.
It is important to remember that these are only guiding factors and a court would consider each case on its own facts. There has been a great deal of case law on this subject and it is advisable to consult a solicitor if at all in doubt, to ascertain the most up to date position.
Therefore, when entering into a short-term occupation agreement, clarity and careful drafting is required to prevent lengthy, costly claims from arising. A formal written agreement is always recommended to prevent something unintended arising by implication. It is recommended that you seek the advice of a solicitor in the interests of certainty to ensure that you are not in fact bound by long-term obligations and timescales that you did not intend, or left high and dry with no premises within which to conduct your business.
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