The Nature of Leases

Question 1

What is the relationship between landlord and tenant?

Answer 1

The landlord owns the property - they hold the reversion. But that ownership is subject to the rights of the tenant, who occupies the property. A lease therefore creates both a contractural and proprietary relationship.

Question 2

Features of a lease (in relation to landlord/tenant relationship)

Answer 2

• Lease is a temporary right of occupation
• A lease is an estate in land that grants the owner of that estate rights of occupation for a term of years (or month(s) if periodic tenancy)
• Full ownership of the property will revert back to the landlord after the end of the lease (reversion)
• A lease is a contract, but because it creates an estate in land, it also creates proprietary interest and relationship with the landlord.

Question 3

What is the difference between a lease and a licence?

Answer 3

A lease creates both a contractural and proprietary right - a contractual relationship.

A lease, as a proprietary right, is much stronger than a licence. It has three main benefits:

1. It binds third parties, such as purchasers of the freehold
2. The holder of the lease has security of tenure. This means that they are entitled to occupy the land for the full term of the lease and possibly even after the lease ends - a licence does not have this right, as under the licence’s terms it could be revoked by the landlord at any time
3. The holder of the lease has exclusive possession and overall control of the land, which is enforceable against anyone, including the landlord. They can also sue for trespass and nuisance on the land (a licence cannot).

Question 4

What are the necessary characteristics of a lease?

Answer 4

1. Certainty of term: a fixed or periodic term.
2. Exclusive possession: right to exclude anyone, including the landlord, from the property (does the landlord have restricted access? Is there ICLR to create a lease with exclusive possession?
3. Rent: not necessary for a lease except implied periodic tenancies. But, if no rent is paid, likely there is no ICLR to make a lease.

Question 5

What are the formalities required to create a legal lease?

Answer 5

Lease exceeding 7 years: Deed + registered as a registrable disposition (and triggers compulsory first registration)

Lease of 3-7 years: Must be in a deed. No need to be registered; will bind third-party purchasers as an overriding interest

Lease of 0-3 years: No formalities required. Can be made orally or in writing, provided the tenant pays rent at market value and is in possession. Covers periodic tenancies and implied periodic tenancies (this is when the tenant has moved in, is paying rent, but there is no written tenancy agreement). Will bind third-party purchasers as an overriding interest.

Question 6

What are the formalities required for an equitable lease?

Answer 6

Must be documented in a contract for land. Must be registered to be binding against third-party purchasers, unless it is an overriding interest with actual occupation for registered land.

• Equitable leases most commonly arise when a lease of more than 3 years has failed (eg not a deed).
• But if a lease fails as an equitable lease and the tenant has moved in and started paying rent, you have an implied periodic tenancy that is legal.

Question 7

What is the key feature of lease contracted out of the Landlord and Tenant Act 1954?

Answer 7

The occupier will not have the right to stay on in the property or renew the lease as a contracted out tenancy is excluded from security of tenure under the 1954 Act.

Question 8

Who is the lessor?

Answer 8

The landlord

Question 9

Who is the lessee?

Answer 9

The tenant

Question 10

What is a licence?

Answer 10

A licence simply confers a personal permission (personal right) to be on someone’s land.

Question 11

What are the differences between a lease and licence?

Answer 11

Lease:
- proprietary right in the land
- Is capable of being enforced against third parties
- A tenant can sue a third party for nuisance or trespass
- A lease can also confer the right of security on tenure
- Enforceable in rem
- Tenants under leases receive various statutory protection

Licence:
- Personal permission to be on someone’s land
- Can only be enforced against the grantor
- A licensee in not entitles to sue a third party for nuisance or trespass
- No security of tenure
- Enforceable in personam
- No statutory protection for licensees

Question 12

What is the right of security of tenure?

Answer 12

This is the right of occupants of residential or business accommodation (if certain circumstances exist) to remain after the formal arrangement ends and request a new lease

Question 13

How can you tell whether an agreement is a licence or a lease?

Answer 13

Courts look at the substance rather than the label - parties cannot alter the effect of an arrangement simply by calling it a licence.

Must have:
- certainty of term; and
- exclusive possession

Rent is not essential.

If characteristics of a lease are not present the arrangement is a licence

Question 14

What are the condition required for a lease to exist?

Answer 14

There must be:

• Certainty of term; and
• Exclusive possession
• Correct formalities used to create the lease

Rent is not essential

Question 15

What is certainty of term?

Answer 15

Means that the tenancy must be granted for a certain duration. Meaning you will need to know when the arrangement will end.

Usual way of satisfying this is a fixed term lease eg. five-year term but can also be evidenced by a periodic term.

Question 16

What is exclusive possession?

Answer 16

Means the right to exclude all others from the property including the landlord.

Question 17

What is meant by a right in rem?

Answer 17

A lease is an estate in the land, a recognised proprietary right to possess the land. Although not technically classed as ‘real property’, a lease is treated as a right in rem (ie a right in the land itself) and the right to possess can be recovered for the duration of the lease if a tenant is deprived of their right.

Question 18

What is a fixed term lease?

Answer 18

Exists where the maximum duration of the arrangement is known from the outset.

Once a fixed term lease is created neither party can unilaterally bring the lease to an end earlier unless there is a break clause present in the lease enabling them to do so.

Question 19

What is a periodic term lease?

Answer 19

A periodic tenancy is technically a lease for one period.

Generally: weekly, monthly, quarterly or yearly which goes on extending itself automatically until either landlord or tenant give notice to terminate the tenancy (notice to quit).

A periodic term may be created expressly or impliedly.

Question 20

What is an express periodic tenancy?

Answer 20

This is where there is a written agreement documenting the agreement.

Question 21

What is an implied periodic tenancy?

Answer 21

This is where there is nothing set out in writing but the certain term arises by looking objectively at all relevant circumstances including payment and acceptance of rent on a periodic basis.

E.g. monthly payments of rent (without agreement on a fixed term from the outset) may create an implied monthly periodic tenancy.

‘Term’ depends upon the period by reference to which the rent is calculated rather than intervals at which it is payable.

e.g. £10,000 a year by four quarterly payments is a yearly tenancy not a quarterly tenancy because the rent is calculated annually.

If lease is agreed for ‘as long as the tenant is trading’ but annual rent is payable quarterly - will find an implied periodic lease for one year

Question 22

What is the difference between exclusive occupation and possession?

Answer 22

Exclusive possession is not to be confused with exclusive occupation where a person occupies land by themselves without others.

Multiple occupiers are capable of having exclusive possession together if they can show certain conditions exist.

Question 23

How do courts determine exclusive possession?

Answer 23

Will be a question of fact and requires examining the substance of the agreement.

The courts will also look at the reality of the situation (so even if a clause has been thrown in to make it look like licence of what would otherwise be a lease - this will be thrown out as a sham).

Scenarios that indicate does not have exclusive possession: (1) Landlord retains a key and has right of access, (2) the landlord provides services; (3) there is a sharing clause.

Question 24

Retention of a key:

Answer 24

Will look at the purpose for which the key is retained.

If the key is only for use in an emergency or by arrangement - the exclusive possession may still exist.

• Courts will look at whether the landlord’s right of access is restricted or unrestricted.

e.g. if access is restricted to carrying out repairs then this is seen as more of an acknowledgment of exclusive possession by the landlord rather than something which will defeat it.

Question 25

Landlord provides services

Answer 25

If the landlord provides attendance or services there is a licence not a tenancy. Services would include cleaning, changing linen etc. The occupier is simply a lodger provided the services are actually carried out and a lodger will never enjoy exclusive possession of the premises.

Question 26

What is a sharing clause?

Answer 26

If the landlord reserves the right to share the property with the occupiers or reserves the right to introduce others to share, that may mean that there is no exclusive possession as the occupier cannot exclude whoever the landlord is able to introduce. - must look at all the circumstances to see whether this is a genuine clause or simply a sham to defeat exclusive possession.

Question 27

What factors should be considered when determining if a sharing clause is genuine or a sham?

Answer 27

1. Size and nature of the accommodation - would it be realistic to introduce others into the accommodation given its size? 2. The relationship between the occupiers (if there is more than one) - would it be appropriate to introduce another to share given the relationship between the occupiers? 3. The wording of the clause (i.e. how widely it is drafted, as the wider it is drafted, the more likely it is a sham clause) 4. Whether the clause has ever been exercised - if it has not been exercised then this may indicate it is a sham clause

Question 28

Differences for business tenancies

Answer 28

Must show certain term and exclusive possession. In the business context, the court tends to construe the documents as a whole to see if the landlord retains control over the property. - more prepared to accept the reality of the label of licence than they are in the residential context as there tends to be more equality of bargaining power in commercial relationships.

Question 29

Business tenancies: control

Answer 29

Will look at the degree of physical control over the premises and conduct of the business If the occupation agreement contains a right for the landlord to relocate and move the tenant to alternative premises it will not be a lease (unless it is a sham clause)

Question 30

What is the difference between a single lease and multiple leases when there are multiple occupiers?

Answer 30

If the occupiers together have the right to exclude all others, including the landowner, then prima facie there is a lease arrangement. Question: single lease or several individual leases Where there is a joint tenancy all co-owners/tenant are deemed to constitute one single entity and own/lease the whole property as one collective entity. Nobody owns a single/specific share; rather each are jointly and severally liable for the terms of the agreement. JTs must have four unities: unity of possession; unity of interest; unity of time and unity of title.

Question 31

What is joint liability in a lease?

Answer 31

Means if one occupier left the remaining occupiers would be liable for the whole rent payment, not an individual share of it.

Question 32

Lease: unity of possession

Answer 32

All must be entitled to occupy the whole of the premises. No-one has exclusive use of any part. If the occupiers can show that they each have exclusive possession of a party of the property then it is possible for them to have individual leases of their own part.

Question 33

Lease: unity of interest

Answer 33

All occupiers must have a leasehold interest for the same term under the same conditions and must be jointly liable for the rent.

Question 34

Lease: unity of time

Answer 34

All of the occupiers' interests must start at the same time

Question 35

Lease: unity of title

Answer 35

All of the occupiers' interests must derive from the same document or from separate but identical documents which are interdependent.

Question 36

What if not all of the four unities are present?

Answer 36

If it is found that the occupants do not have all of the four unities, they cannot have a joint tenancy. If neither a joint tenancy nor an individual tenancy exists then the occupants can only be individual licensees sharing with each other. But if they can show that they each have exclusive possession of a part of the property then it is possible for them to have individual leases of their own part. If neither a joint tenancy nor an individual tenancy exists then the occupants can only be individual licensees sharing with each other. - must look at substance of the arrangement e.g. separate agreements will not necessarily defeat unity of interest or title on the facts (are they interdependent? ie sep agreements for a couple?)

Question 37

What are the factors that may defeat a lease?

Answer 37

1. Where there is no intention to create legal relations 2. Where there is a service occupancy

Question 38

When will there be no intention to create legal relations?

Answer 38

Where there is a family arrangement, an act of friendship or generosity it can be presumed that there is a lack of such intention. However, if there is a degree of formality to the agreement and/or market rent is paid then this would evidence an intention to create legal relations.

Question 39

When is there a service occupancy?

Answer 39

Must ask: whether the employee is in occupation for the better performance of their job role. (or is it just a perk) Only arises where there is an employer/employee relationship between the landowner and the occupier. Where the occupier is required to live in the premises for the better performance of his duties as an employee there is no tenancy even though rent may be paid. E.g. caretaker's flat, gamekeeper's cottage and domestic staff accommodation Hagrid did NOT have a lease.

Question 40

What formalities are required for a legal lease?

Answer 40

General rule: to create a legal lease, a deed must be used. Deed: intended to be a deed (says deed), signed, witnessed, delivered (dated) Leases over 7 years: lease must also be registered Leases 7 years or less: lease does not need to be registered. Still takes effect as legal lease and will be binding on a new freehold estate owner as an overriding interest.

Question 41

What is the short lease exception (parole leases)?

Answer 41

A lease with a term of three years or less need not be created by deed or even be in writing provided the following three conditions are met: 1. The lease takes effect in possession (i.e. the tenant takes the lease immediately) 2. The lease is granted at 'best rent' (meaning market rent) 3. The lease is not subject to a fine or premium (meaning no upfront payment for the grants of the lease). Do not need be registered (as only leases over 7 years need to be registered).

Question 42

What types of leases are short leases/parole leases?

Answer 42

Short fixed term leases (with a maximum term of three years). Express periodic tenancies (where there is a tenancy agreement) Implied periodic tenancies (where an occupier is in possession and paying rent at regular intervals) Periodic tenancies only fall within this ambit if each individual period of the tenancy is for three years of less (which is common).

Question 43

What happens if there is an equitable lease and an implied legal lease?

Answer 43

The equitable lease will prevail.

Question 44

What are the requirements for an equitable lease (an estate contract)?

Answer 44

- in writing - contains all the terms - signed by both parties