Property Licenses

What Is A License?

A license is where someone is given permission to occupy a property or room but does not acquire the rights of a tenant. This often appears an attractive proposition to a landlord, who may not wish to be bound by the landlords repairing covenants or for occupants to acquire security of tenure, and it was particularly attractive prior to 1989 when the Rent Act 1977 applied to tenancies and it was difficult to recover possession of property. However, be warned that if you try to set up a license in a situation where the occupation would normally be a tenancy, this may in fact cause you more problems than if you had accepted it was a tenancy from the start.

In a landmark case in 1985, the court held that in a situation where an occupier has exclusive possession of a property or part of a property and is paying a rent, then normally a tenancy will be created. This was in a situation where a landlord was trying to circumvent the Rent Act by getting the occupants to sign a ‘license agreement’ which stated that the occupation was pursuant to a licence, whereas in fact their occupation contained all the elements of a tenancy. This case (Street v. Mountford) is the authority for the rule that in a license/tenancy context, it is what actually happens that is important not what is stated on any document signed by the parties, and that you cannot make what would otherwise be a tenancy into a license simply by getting the occupier to sign a document headed ‘License Agreement’.

(Note that in this article we are only looking at residential occupation, and the rules discussed will not necessarily apply to agreements for lock up garages, storage space etc.)

Common Situations Where Licenses Are Created

Lodgers

If you have a situation where someone is renting out a room in their house to a lodger, and share living accommodation, such as the kitchen, bathroom, and sitting room with him, then this is a license agreement and the lodger will not acquire any tenants rights. This is probably the most common situation where licenses are created. So common is it that the government has accepted that in this sort of situation income is rarely declared, and has provided for a ‘rent a room’ tax free income allowance of £4,250 pa. Note, however, that if a lodger remains in occupation after the original landlord has sold the property on, he may acquire tenants rights.

Employees

If an employee as part of the terms of his employment is genuinely required to occupy residential accommodation for the better performance of his duties, then his occupation will be pursuant to a license and not to a tenancy. Examples include a gamekeeper required to live in a cottage on the estate where he works, a surgeon whose post requires residence within the hospital concerned, and a hotel manager occupying rooms in the hotel premises. However, this will not apply if an employee is provided with cheap accommodation by his employer as a ‘perk’. The important point is that occupation of the accommodation is part of the terms of his employment. If it is not then he will have a normal assured shorthold tenancy (or protected tenancy if he has been in occupation since before 1989). A landlord/employer in this situation should therefore make it clear in the occupiers contract of employment that the employee is required to reside in specified living accommodation, and should also make it clear that this is for the better performance of his duties.

No Intention To Create Legal Relations

In some situations no tenancy will be created because the circumstances of the letting make it clear that the occupier was only intended to have a license to occupy the property and nothing more. However, this category is limited to family arrangements, acts for friendship, or generosity. Be warned though that even in a family situation the courts will probably imply a tenancy if the occupant is paying rent. It is really best, when allowing friends or family to live in property, either just to allow them to stay rent-free for a very limited period, or to get them to sign a proper tenancy agreement and pay you rent. Otherwise, if things go wrong and you want them to leave you could be faced with a messy court case with no proper paperwork.

Serviced Accommodation

If you provide services, such as cleaning where you need regular access to the room, and meals, then the occupancy will be pursuant to a license rather than a tenancy. This is the situation with most hostel and hotel accommodation. However, note that for this to be a genuine license, you should actually provide the services. If your agreement with the occupier refers to services, but in fact they are never and have never been provided, you may find you are stuck with a tenancy.

‘Sharing’ Arrangements

This is the type of arrangement that was discussed in the case of Street and Mountford mentioned in the introduction. Normally, if someone has an agreement for a room in a shared house, then this will be an assured shorthold tenancy with the tenant having exclusive occupation of his designated room and shared use of the common parts of the property (e.g. kitchen, bathroom and sitting room) with the other tenants. However, sometimes, to create a license agreement where the landlord is not bound by the normal covenants following a tenancy (such as the tenants security of tenure or the landlords repairing obligations), a landlord will specify in the agreement that the occupant does not have exclusive occupation of his room and will reserve the right to move him to a different room in the property.

Sometimes this type of agreement will set up a genuine license situation. However, most Judges are hostile to them, regarding them (generally quite rightly) to be a ‘device’ on the part of the landlord to avoid the provisions of the housing legislation. In the absence of very clear evidence that in fact an agreement is a genuine license, a Judge in any case brought before him will probably find that the occupation is pursuant to a tenancy. The landlord may then find himself in a much worse situation than if he had accepted that the occupation was a tenancy from the start, as he will almost certainly be ordered to pay the tenant’s legal costs, and will find it more difficult to evict the tenant, as he will not have the proper paperwork.

Probably the best way for a landlord to genuinely create license agreements in a shared house situation is by providing services, particularly cleaning services where the room is regularly entered and cleaned. If he can also show that he does sometimes move occupants from one room to another, then this will reinforce his case.

It follows on from this that an investment landlord should be wary of relying on ‘sharers’ license agreements in shared houses when purchasing an investment property, and would be best advised, unless services are genuinely provided to the occupiers, to regularise the situation by issuing the occupiers with assured shorthold tenancy agreements, either jointly or for their own individual room with shared use of the common parts.

The Features Of A Licence

In a genuine license situation, a licensee’s rights are limited, and nothing like those awarded to tenants. For example:

• There will be no statutory rent control

• The licensee will have no security of tenure

• His occupation rights will be personal to him and he will be unable to assign them or pass them on to his spouse or family (as opposed to the succession rights of tenants in the Housing legislation)

• The landlords repairing obligations as set out in the Landlord and Tenant Act 1985 will not apply

So, what rights does a licensee have? Well, he is entitled to enforce his contractual rights. So he will be entitled to stay in the property during any fixed term in his license agreement, and he will be able to claim damages if he is forced out before this, or before any notice period in the agreement, has expired. Although the statutory repairing covenants do not apply to licensors, they do have an implied duty to see that the premises are reasonably fit for the purpose for which they are let. And although the licensee will not have the security of tenure of a tenant, he will generally, unless he is a lodger, be protected under the Protection from Eviction Act 1977, which means that he can only be evicted by way of a court action.

So What Are The Rules Relating To The Eviction Of A Licensee?  

Generally the Protection from Eviction Act 1977 protects all residential occupiers, including licensees. This means that it is a criminal offence for a residential occupier to be evicted other than by court proceedings.

If a licensee is protected under the Act, the licensor will have to give him proper notice to vacate (this should normally be by a written notice of not less than four weeks) and then, if he has not left, issue proceedings. Provided it is a genuine license agreement, the landlord should be entitled to an order. However, he will not be able to use the accelerated possession procedure, as this is only available for landlords of assured shorthold tenancies using the ‘notice only’ possession procedure.

This procedure should be followed, for example, by employers wishing to evict former employees from premises they were required to live in for their work, and landlords with genuine ‘sharers’ agreements for shared houses.

However, some licenses are excluded from protection under the Act. One of the most important examples of this is of lodgers sharing accommodation with their landlord. Also excluded from protection are licenses granted to someone to occupy premises for a holiday, licenses where someone is allowed to stay in property rent free, and occupiers of hostel accommodation provided by an authorised landlord, for example local authorities and housing trusts.

In these circumstances it is not a criminal offence for a landlord to evict the occupier without a court order, provided that there is no violence involved (which would put the landlord in breach of the Criminal Law Act 1977, which is the act relied upon by squatters).

Conclusion

There will be few situations where the investment landlord today will have licensees in his properties as opposed to tenants. These will generally only be if he provides services, such as cleaning services, particularly for short-term holiday lettings. There may also be occasions where he will employ someone to act as janitor or manager of a shared house where occupation is part of the job. However, apart from this, if he is letting out a shared house on individual agreements, it is really best to make these assured shorthold tenancies from the start, rather than try to engineer a ‘sharing’ agreement. Assured shorthold tenants do not have long-term security of tenure, so landlords do not have the problems that they did under the Rent Act. And any landlord seeking to avoid his repairing obligations by letting to ‘sharers’ will probably receive short shrift from any Judge hearing a disrepair claim brought by the occupiers.

However, taking in a lodger into your own home remains a situation where the statutory protection given to occupiers is excluded, and landlords of lodgers are generally free to deal with their lodgers strictly according to the contractual agreement made, as well as being normally free from the obligation to pay income tax on the rent received.

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