Documenting flexible arrangements: lease or licence? (England and Wales)


In this video, Philip Collis and Alexandra Holsgrove Jones discuss:

  • Should a shared space provider grant a lease or a licence?
  • What are the risks for the landlord? Security of tenure
  • What about lenders?
  • Should rent be inclusive?
  • What should the repair/decoration obligations be?
  • How will dilapidations be dealt with?
  • Should you have a lease on standard terms but with more frequent break rights?

Documenting flexible arrangements: lease or licence? (England and Wales)

Transcription

Alexandra Holsgrove Jones:

Welcome to another of our TLT taster sessions on current issues affecting the real estate market. We have discussed in previous sessions, the variations to leases that are being documented to allow flexibility, in terms of both lease terms, and the reconfiguration of premises.

Alexandra Holsgrove Jones:

In this session, we're going to be exploring how flexible arrangements should be documented. I'm Alexandra Holsgrove-Jones, senior professional support lawyer in TLT's Real Estate Group. And I'm joined by Philip Collis, a partner who specialises in property-backed security and landlord and tenant work.

Alexandra Holsgrove Jones:

So Phil let's consider the scenario where you have a business which is seeking extra space. Perhaps they would like some staff to return to the office when they're allowed to do so, and need additional space to enable staff to operate in a COVID-secure way. Perhaps they're expanding, but don't know if the expansion will be sustained. In both of these examples, the business may only want the additional space for a limited time period. Also their requirements may change. They may need more or less space and want to be able to take this at short notice. In these circumstances, should the parties enter into a lease or a license?

Philip Collis:

So Alex, the question of whether a lease or license should be granted really comes down to whether the occupant is being given exclusive possession of the premises. By that I mean, are they getting a defined area, from which they can exclude others, including the landlord, by locking the door? If so, whatever the document says on its face, and whatever you call it, it is likely to be a lease. If on the other hand, the tenant's occupation is more fluid, perhaps it is agreed to occupy a certain number of desks in a shared space, where the designated desk can be moved around. Occupation is therefore truly shared with others. And actually that points it to being a license to occupy only.

Alexandra Holsgrove Jones:

So what you call the document or the arrangement is irrelevant. What are the risks for the parties in entering into what they think is a license, when it is in fact a lease?

Philip Collis:

The most obvious issue is actually for the landlord, in relation to security of tenure. So if a landlord lets party into occupation under what it thinks is a license, but the occupant is actually given exclusive occupation, that will be a lease. Now, if the arrangement is for six months or longer, the occupier could obtain security of tenure under the Landlord and Tenant Act, 1954. That could make it difficult for the landlord to claim the premises at the end of the contractual term, and would give the tenant the right to apply to court for a new lease if a new one isn't agreed.

Philip Collis:

Now it's important to remember that if the initial tenancy is for less than six months, if it contains a provision for renewing the term or extending it beyond six months from the beginning of the arrangement, it will still fall within the Landlord and Tenant Act, 1954. So the tenant could obtain security of tenure.

Philip Collis:

Now, in order to regain possession of the premises, where there is security of tenure, the landlord would have to go through the relevant procedure under the 1954 Act, and would have to show one of the grounds, entitling it to possession. Now, even if it could do this, the procedure can be time-consuming and costly. So it is something that the landlord is going to want to get right, to make sure he'd understand whether or not the tenant could get security of tenure.

Alexandra Holsgrove Jones:

And what about lenders? If a landlord is allowing occupation on flexible basis, would they need lender's consent in those circumstances?

Philip Collis:

Normally where a property is charged, a lender's consent to the grant of the lease is required. Now it's not required for the granter of a license to occupy because such a license is inherently a personal interest to the occupier and between the parties, rather than a proprietary right in the property. As such, it shouldn't be binding on the mortgagee or a future owner, whereas a lease may well be. But saying that, if you are calling something a license, when it's in fact a lease, then you would be caught by the requirement to get a lender's consent if it is required under the terms of the mortgage.

Alexandra Holsgrove Jones:

Thanks Phil. Now, the parties might conclude that they're not dealing with a license because the occupier is getting exclusive occupation of a fixed area. However, the occupier might still want flexibility in terms of the length of the term, for instance. They might also want to get the benefit of services, such as printing, the use of meeting rooms, which might be able to be booked as and when required, wifi and other services. Can they speak out within the confines of a traditional lease?

Philip Collis:

Well, the good news is, is that traditional leases are evolving. And they need to do this to accommodate the changing requirements of occupiers and property owners. So for example, in the leisure and retail industries, we're seeing more and more turnover rents. In the office sector, with service offices on the rise, inclusive rents are likely to become more commonplace. And that is rent which includes not only the traditional basic rent, but also insurance, service charges, et cetera.

Philip Collis:

So the traditional lease is very much evolving. And we're also seeing other clauses going in, such as more frequent and even rolling break rights. Although, of course, they provide the landlord with a less certain income stream, but in an increasingly competitive market for landlords seeking occupiers, then actually they may have to do without that security.

Alexandra Holsgrove Jones:

And what about repairing obligations in these kinds of leases? If you're only dealing with a very short term lease, an occupier might not want to have repairing obligations or deal with dilapidations at the end of term.

Philip Collis:

That's true. And we may well see leases, which have only very basic repairing obligations going forward with occupants liable for damage that they cause, that goes beyond fair wear and tear. And this is very much a change from the traditional full repairing and insuring lease, which is really quite onerous in terms of repair obligations.

Philip Collis:

It may take time for the market, particular lenders, to become comfortable with it. But again, in a situation whereby there is competition for occupiers, the market may well be moving. Similarly, if there's a service charge, tenants are not going to be happy to contribute to the repair of common parts, structure or roof of a building, where they're likely to only be in place for a relatively short period of time. Historically, tenants have been required to contribute to such costs, but going forward, they may well need to be included in the rent.

Alexandra Holsgrove Jones:

So you talk about the traditional lease evolving. Would a simpler way to deal with flexible arrangements, just be to have a lease with more frequent break rights?

Philip Collis:

Yes, that is very much an option. But it won't necessarily be very attractive to tenants, where there's a substantial rent. And the reason for that is that if you have a lease of, say, five years, with a right to break every 12 months, the tenant is still going to have to pay stamp duty land tax on the whole five-year term at the beginning of the lease. If it breaks after 12 months, it won't get a refund from HMRC, and therefore will effectively have paid more SELT than it needed to.

Alexandra Holsgrove Jones:

So how do you see lease drafting evolving to enable tenants to have more flexibility, while still making the lease an attractive investment for landlords and their lenders?

Philip Collis:

Well, despite the reputation, leases don't have to be for a long term, particularly unwieldy documents or drafted heavily in the landlord's favor. I think we're going to see great use of shorter documents with more basic terms and possibly written in plain English. That's not to say they are simplistic, and they need to be professionally drafted, but they can be more easily understandable and quicker to put in place.

Philip Collis:

Now, if the space is more attractive, landlords will need to provide that the process of entering into a lease is much more user-friendly, and permits greater flexibility for their tenants. Now, at least along these lines, we'd not have extensive service charge provisions, maybe just a list of services to be provided by the landlord. It's unlikely to have rent review provisions and the tenant obligations are going to be much more straightforward, possibly with no ability to assign or sublet, given that they may well be rolling breaks or frequent breaks. I would expect limited repair obligations, as we discussed, and also very limited in relation to decoration.

Philip Collis:

I think essentially short-term leases will be much more user-friendly and look like your typical license to occupy. As matters stand, leases of less than three years do not have to be executed as a deed, but to help with making leases quicker and easier to enter into, reform of the process to exclude security of tenure, under the 54 Act, would obviously be helpful. Now, all this isn't to say that there very much won't remain a place for leases in the form which is familiar to us today, for lettings of larger, more valuable space, or which are for a longer term, so more than say three or five years. I think there will continue to be a demand for those four key strategic important buildings, where actually it is in the interest of all parties, that there is a long-term secure lease put in place, which provides a security, where that is more important than flexibility.

Alexandra Holsgrove Jones:

Thanks Phil, that's been really helpful. And thank you for joining us. If you have any questions on the issue, to raise them, please get in touch. And you can also sign up for other TLT taster sessions.

 

Get in touch

Related insights & events

View all

Hot topics

Related services