The Fundamentals of Leasing
The Real Estate industry is a complex one, with its own, very particular, terms. As part of our Real Estate and Construction blog series, Real Estate partner Owen McKenna of the Group’s specialist corporate and commercial practice, Beyond Corporate, has set out a helpful summary of the principal terms commonly found within a commercial lease and their significance to both a landlord and a tenant, explains what a lease is, the essential characteristics for a lease to exist and the differences between leases and licences.
Lease, or licence?
A commercial lease generally refers to a written agreement which not only creates a tenancy of business premises, but also sets out the often detailed and extensive provisions which will govern the relationship between the landlord and the tenant.
How to decide whether there is a lease
The courts have helpfully assisted us over the years and there are two essential characteristics which must be present for a lease to exist:
* it must grant exclusive possession of defined premises to a tenant. A person has exclusive possession if it can exercise the rights of the owner and exclude both the landlord and all other third parties from the premises (except to the extent that the landlord has reserved rights of entry, for example to carry out works). Possession is not the same as occupation: a tenant may have possession by virtue of being able to receive rents but the person in occupation could be the undertenant to whom the tenant has granted an underlease
* it must be granted for a term which is definite, or can be made definite, by either party.
The payment of rent is not essential for the creation of a lease, but agreements will usually always provide for some consideration to pass between the parties.
A licence, by contrast, is a contractual agreement which permits the licensee to do something which would otherwise be unlawful. When drafting licences to use or occupy property, care must be taken not to give exclusive possession of the property or a defined area to the licensee. If there is any dispute as to whether or not a property is occupied under a lease or a licence, a court will look at the substance of the agreement. Labelling an agreement which grants exclusive possession as a licence will not be enough to prevent it from being a tenancy.