Lease v licence?
Property lawyers are well versed in the classic distinction between a lease and a licence and, for a fuller review of that distinction, readers should check out my colleague Dean Hunt’s article here: Lease vs Licence: Key Differences in Commercial Property.
My article considers the constituent requirement that a lease must be for a ‘certain term’, based on recent case-law and the consequences of not ensuring as such.
The key differences
It is fair to say that what can often distinguish between a lease and a licence is whether the relevant agreement grants exclusive possession of the property, and whether it is personal to the parties.
Defining ‘the term’ in a lease
That stated, what has taken greater prominence in recent history is the fundamental feature of a lease that it must be for a certain term.[1]
Whilst this might in many quarters now appear to be one of those archaic features of the law such that, if two parties clearly intend to create a lease with all its incidental rights,[2] but do not wish to agree at the outset its maximum duration, they should be able to do so, the UK Supreme Court has had occasion to jettison the requirement from our law and declined to do so.[3]
It therefore remains important that parties take care in how they are defining ‘the term’ in their lease, at least where the same has been reduced to writing. Ignorance of this fundamental requirement can have significant financial consequences as a recent Court of Appeal case demonstrates.
AP Wireless[4]
The decision in AP Wireless centred on the proper interpretation and legal effect of a single clause in a written agreement dated 11 March 1997. This agreement was entered into between the owner of Fields Farm, Congleton Road, Sandbach and Orange Personal Communications Services Limited to install and maintain telecommunications equipment including a phone mast on a site on the owner's land (the Agreement).[5]
Clause 2.1 (clause 2.1) of the Agreement provided as follows:
“This Agreement shall come into effect on the date shown above and shall continue for no less than the Minimum Term [10 years from 11 March 1997]. It may be terminated by either party giving to the other not less than 12 months' notice in writing to expire at any time on or after the expiry of the Minimum Term”.[6]
First instance
The first instance judge decided the Agreement did not create a certain term. In those circumstances, he held that the tenancy purportedly created by the parties was void and took effect as a licence. This was so notwithstanding that the other two requirements for a tenancy to exist, namely the payment of rent and exclusive possession, were present. The judge thought that his decision was compelled by the terms of clause 2.1, though considered it unsatisfactory.[7]
On appeal
The Court of Appeal emphasised the importance of its decision in that, if the owner were right that the Agreement created a valid tenancy (or that there would be an inferred periodic tenancy) the same would be renewable under the terms of Part II of the Landlord and Tenant Act 1954, attracting a higher rent. If the owner were wrong, and the judge was right that the occupier holds only a contractual licence, that licence would be renewable under the terms of the Electronic Communications Code now contained in schedule 3A to the Communications Act 2003 (the Code), attracting a lower rent. The decision was accepted to have consequences for numerous other agreements beyond the Agreement.[8]
On appeal, the owner argued that the Agreement was a tenancy, summarily because:
- The term of 10 years was not of uncertain duration and since there was no fetter of uncertain duration on either parties' right to serve a notice, the tenancy was valid[9], or
- The Agreement was either (i) a yearly tenancy determinable on any date after 12 months' notice with a minimum duration of 10 years, (ii) a 10-year fixed term followed by a yearly tenancy which was terminable on any date after 12 months' notice, or (iii) a 10-year fixed term followed by a daily periodic tenancy terminable on 12 months' notice (which would all suffice as a valid tenancy)[10], or
- Assuming the invalidity of the Agreement, the judge ought to have inferred a yearly periodic tenancy from the start (as happened in Prudential), rather than holding that the Agreement constituted a contractual licence.[11]
The decision
All three arguments were rejected by the Court of Appeal. The Court upheld the first instance judge’s decision, reducing the parties to a contractual licence, the consequence of which, for the owner, was that they were entitled to the lesser rent under the Code.
The reasons for rejecting these arguments were (numbering mirrors the above):
- On proper interpretation there was an uncertain term because it could not be said with certainty at the start of the term of 10 years when it might end. It could end on any day chosen by one of the parties on or after 11 March 1997. It was not saved by the exception for periodic tenancies terminable by notice at the end of a repeating period, because the agreement did not create a renewable periodic tenancy at all[12]
- In summary, the term of the tenancy purportedly created by the Agreement was uncertain at its inception on 11 March 1997, because it was, on its terms, capable of lasting for an indeterminate period ending (possibly) on any day from 11 March 2007 for ever afterwards[13]
- The inference of a contractual licence on the same terms as the Agreement respected almost all the terms that the parties agreed, including the termination provision in clause 2.1. The court should be willing to disregard the intentions of the parties unless there really is no other possible course. Here, the course the judge adopted was a reasonable one in my view[14]
It must be appreciated that the net effect of that result is that the owner of the land 1) did not have the agreement they thought they had and 2) was not entitled to the higher rent they would have been entitled to if the Agreement had been a valid tenancy, which the parties had clearly intended at the outset.
Pretoria
Whilst AP Wireless has probably achieved greater renown since the issue of certainty of term was more central, the Court of Appeal were seized of the issue as recently as May 2023, though the case was not cited in AP Wireless.[15]
In Pretoria, the Court of Appeal had to decide whether the parties entered into a binding agreement for lease contained in clause 1 of Heads of Terms ("HoT") signed by the parties on 27 November 2013. The judge at first instance decided there was not and the Court of Appeal upheld this. Following signature, the parties acted substantially in accordance with the HoT.[16]
Whilst ‘certainty of term’ was only an issue raised on appeal, it was allowed to be raised and the Court of Appeal in considering the issue again re-emphasised that the time from which the term of a lease is to begin is a term that the law regards as ‘essential’ to the creation of a binding contract for lease. Thus, even where it is plain that the parties intended to enter into a binding contract for lease, if the time from which the lease is to begin is uncertain, the agreement is incomplete; and there is no binding contract.[17]
The Court of Appeal decided that it was not possible to deduce from the terms of the agreement, with reasonable certainty, when the term was intended to begin. This was because the final clause of the HoT provided for a formal agreement to be drawn up within one month of planning permission having been achieved. The barrister arguing for validity of the tenancy submitted that the 25 year term would begin on whatever date the lease happened to be executed, whether that was before or after the expiry of the one month period. That was decidedly a "rolling" 25 year term, the very antithesis of certainty.[18]
Practical implications
Though perhaps not exhaustive, the practical implications of the decisions in both AP Wireless and Pretoria, are as follows:
- Just because the parties to an agreement clearly intend a certain type of agreement, that does not mean it will necessarily take effect as they intended
- In particular, how ‘the term’ has been defined in any agreement which, is presently considered to be a lease may not, on proper interpretation, be one
- If that is the case, that could lead to ensuing disputes and undesirable outcomes (e.g. the lower rent which the owner was entitled to in AP Wireless)
- As such, parties to agreements which are presently considered to be subsisting leases, should undertake a document review exercise to:
- Ensure they are in an informed position and
- Once informed, take any precautionary steps as may be advisable in order to mitigate possible existing risk
Conclusion
Just because it looks like a lease, walks like a lease and talks like a lease, does not necessarily mean it is one. Where it is not, this may have significant consequences for you, including to your financial detriment.
It would be advisable to conduct a document review to ensure you are in an informed position relating to this and, so you can arrange to take any precautionary steps advisable in your circumstances to mitigate possible risk (this could of course include consideration of prospective claims against professionals who formerly assisted in the drafting of your agreement).
Wright Hassall’s property and commercial litigation teams can assist with the above, and related issues.
[1] Right back to the beginnings of the common law, it has been a requirement of a valid lease that it has a certain beginning and a certain ending (Pretoria Energy Company v Blankney Estates Limited [2023] EWCA Civ 482 (“Pretoria”)
[2] Which may of course include statutory rights under the Landlord and Tenant Act 1954 (“the Act”), at least within a commercial context
[3] Para 35 of Mexfield v Berrisford Housing Co-operative Limited [2011] UKSC 52 (“Mexfield”) though it should be noted that the agreement in that case was, by operation of the law, converted into a tenancy for a term of 90 years (Such only being available where the parties to the relevant agreement are individuals further to s.149(6) of the Law of Property Act 1925 “the 1925 Act”) albeit, absent the 1925 Act, it would have taken effect as a contractual licence.
[4] AP Wireless II (UK) Limited v On Tower (UK) Limited [2025] Civ 971 “AP Wireless”
[5] Para 1, ibid.
[6] Para 2, ibid.
[7] Para 3, ibid.
[8] Para 8, ibid.
[9] Para 35, ibid.
[10] Para 39, ibid.
[11] Para 47, ibid.
[12] Paras 36 and 37, ibid.
[13] Paras 40 to 46, ibid.
[14] Paras 50 to 52, ibid.
[15] See footnote 1 for citation of Pretoria
[16] Paras 13 and 14 of Pretoria
[17] Para 57, ibid.
[18] Para 62, ibid.
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