Landlord and tenant law - Essential characteristics of a lease, including difference between a lease and a licence

Learning Outcomes

After reading this article, you will be able to identify and explain the essential legal characteristics of a lease, distinguish a lease from a licence, and understand why this distinction matters for statutory protection, enforceability, and exam scenarios. You will also be able to apply these principles to SQE1-style questions and practical examples, including the impact of registration and the legal/equitable status of leases.

SQE1 Syllabus

For SQE1, you are required to understand the essential characteristics of a lease, the distinction between a lease and a licence, and the legal consequences of that distinction. In your revision, focus on:

• the definition and requirements for a valid lease (including exclusive possession and certainty of term)
• the difference between a lease and a licence, and why this matters for statutory protection and enforceability
• the legal and equitable status of leases, including relevant formalities and registration requirements
• the impact of registration on leases and licences in both registered and unregistered land.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following is an essential characteristic of a lease?
   1. exclusive possession
   2. ability to assign
   3. payment of rent
   4. all of the above
2. Which statement best describes a licence?
   1. It grants exclusive possession for a fixed term.
   2. It creates a proprietary interest in land.
   3. It is a personal permission to occupy, not binding on purchasers.
   4. It must always be in writing.

3. True or false? If an agreement gives exclusive possession for a fixed term, but is labelled a "licence," the courts will always treat it as a licence.

4. Which leases must be substantively registered at HM Land Registry to be legal?
   1. all leases
   2. leases for more than seven years
   3. leases for three years or less
   4. periodic tenancies only

Introduction

A lease is a legal estate in land that grants a tenant the right to exclusive possession for a defined period. Understanding what makes an agreement a lease, rather than a licence, is fundamental for SQE1 and for advising clients. The distinction affects statutory protection, enforceability, and the rights of both landlords and occupiers. This article explains the essential characteristics of a lease, the difference between a lease and a licence, and the practical and exam consequences of that distinction.

Essential Characteristics of a Lease

A lease is not just any agreement to occupy land. For an arrangement to be a lease, it must satisfy two core requirements:

1. Exclusive possession – The occupier must have the right to exclude all others, including the landlord, except as provided in the agreement.
2. Certainty of term – The lease must be for a fixed or at least a certain maximum period, known from the outset.

Key Term: lease
A proprietary legal estate granting exclusive possession of land for a certain term, enforceable against third parties.

Key Term: exclusive possession
The right of the occupier to control the land and exclude all others, including the landlord, except as agreed.

Key Term: certainty of term
The lease must have a fixed maximum duration or a term that can be calculated from the outset.

Rent is not essential for a lease, but its presence can help show the parties intended a formal landlord-tenant relationship.

Legal and Equitable Leases

A lease can be legal or equitable, depending on how it is created and whether the correct formalities are followed.

Key Term: legal lease
A lease created by deed (except for certain short leases), meeting statutory formalities, and (if required) registered.

Key Term: equitable lease
A lease arising from a specifically enforceable contract to grant a lease, where legal formalities are not fully satisfied.

Formalities

• Leases for more than three years must be created by deed.
• Leases for more than seven years must also be substantively registered at HM Land Registry to be legal.
• Leases for three years or less can be created orally or in writing without a deed, provided they take effect in possession, at the best rent, and without a fine (LPA 1925, s 54(2)).

Worked Example 1.1

Scenario:
A landlord and tenant agree in writing to a five-year lease, but do not execute a deed. The tenant moves in and pays rent.

Answer:
No legal lease exists because a deed is required for leases over three years. However, if the agreement is a specifically enforceable contract, an equitable lease may arise.

The Nature of a Licence

A licence is a personal permission to occupy or use land, not creating any estate or interest in land. It does not grant exclusive possession and is not enforceable against purchasers.

Key Term: licence
A personal permission to occupy or use land, not conferring any proprietary interest and not binding on successors in title.

Licences can be contractual (for consideration), bare (gratuitous), or coupled with a grant (to facilitate another right, such as a profit à prendre).

Lease vs Licence: The Key Distinction

The main legal test is exclusive possession. If the occupier has exclusive possession for a term, and the arrangement is not explained by another relationship (such as service occupancy or family arrangement), it is likely to be a lease, regardless of the label used.

Substance Over Form

Courts look at the substance of the agreement, not the label. Calling an agreement a "licence" does not prevent it being a lease if exclusive possession and certainty of term are present.

Worked Example 1.2

Scenario:
A couple sign separate "licence" agreements for a one-bedroom flat, but live together and have exclusive possession for a year. The landlord retains a right to introduce others, but never does.

Answer:
The courts are likely to find a lease exists. The right to introduce others is a sham if never exercised, and the couple have exclusive possession for a certain term.

Practical Consequences

• A lease gives the tenant statutory protection (e.g., security of tenure, rent regulation).
• A lease can be assigned or sublet, subject to the lease terms.
• A licence is personal, revocable (subject to contract), and does not bind purchasers.

Exam Warning

For SQE1, remember that exclusive possession is the decisive factor. The label "licence" is not conclusive. Always analyse the facts.

Registration and Leases

Registered Land

• Legal leases for more than seven years must be substantively registered at HM Land Registry to be legal.
• Legal leases for seven years or less are overriding interests under Schedule 3, para 1 of the Land Registration Act 2002, binding purchasers even if not registered.
• Equitable leases can be protected by registering a notice, but may also be overriding if the tenant is in actual occupation.

Unregistered Land

• Legal leases bind all purchasers automatically.
• Equitable leases must be registered as Class C(iv) Land Charges to bind a purchaser for value of a legal estate.

Worked Example 1.3

Scenario:
A tenant is granted a ten-year lease by deed, but the lease is not registered at HM Land Registry.

Answer:
The lease is not a legal estate because registration is required for leases over seven years. The tenant may have an equitable lease if there is a specifically enforceable contract.

Leasehold Covenants and Liability

Leasehold covenants are promises in the lease, setting out the rights and obligations of landlord and tenant.

• In pre-1996 leases, the original parties remain liable for the duration of the lease (privity of contract).
• In post-1996 leases (Landlord and Tenant (Covenants) Act 1995), liability passes to the assignee, and the original tenant is released on assignment.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• A lease requires exclusive possession and certainty of term.
• The label "licence" does not determine the legal nature of the agreement; substance over form applies.
• A lease creates a proprietary interest in land, enforceable against third parties; a licence is a personal right only.
• Legal leases for more than three years require a deed; for more than seven years, registration is also required.
• Leases for three years or less can be created orally if certain conditions are met.
• Licences do not grant exclusive possession and are not binding on purchasers.
• The distinction between lease and licence affects statutory protection, assignability, and enforceability.
• In registered land, leases over seven years must be registered to be legal; leases for seven years or less are overriding interests.

Key Terms and Concepts

• lease
• exclusive possession
• certainty of term
• legal lease
• equitable lease
• licence