To Lease or to License…
In the United Arab Emirates, there are stringent requirements for leasing… if only there was another way.
There are two concepts which many jurisdictions recognize, a lease and a license. One of these concepts is formal in nature, while the other offers flexibility and an alternate solution to being tied into a lease agreement. It is an informal agreement purported to be beneficial for all parties involved.
In its simplest form, the difference between a lease and a license is as follows; a lease is the granting of a legal interest in land which gives exclusive possession for a fixed period of time. A lease arises when a landlord grants a tenant such a legal right in return for the payment of a rental amount. A license arises when a licensor grants a licensee a contractual right to occupy premises in return for the payment of a license fee. In law, a licensee is not entitled to exclusive possession of the premises.
Although there the variances can sometimes seem vague, there are unequivocal repercussions for following one route as opposed to the other. The fundamental differences between a lease and a license will be highlighted below. The essential element of both forms of legal relationship is the granting of a right to use premises in a certain manner. One of the key legal differences worth mentioning here is that a lease grants an interest in land which gives a tenant exclusive possession and security of tenure while a license is a more adaptable agreement and is not capable of affording to the licensee the same security of tenure as a lease.
There are certain foundational principles inherent in a lease agreement which distinguish it from that of a license, namely:
- In a lease agreement, the lessee has the right to exclude any other person from the leased premises, rather than a mere contractual right to enter and use the premises for a particular purpose;
- A lease agreement creates an interest in land, rather than a personal contractual right; and
- A lease will run with the land. In cases where the ownership of the land changes, the new owner will have to acquire the land subject to the lease. However, this is not true in the case of a license – should the ownership change, the licensee will have no rights against the new owner of the land unless the license is transferred by agreement between the old owner, the new owner and the licensee.
- When considering the statutory rights of the licensee and the lessee – a lessee has certain statutory rights to request the court to grant specific performance such as the reinstatement of the lease even when terminated by the landlord due to the tenant's default. These such remedies are not available to a licensee of premises.
The debate of whether a person is a licensee or a tenant has been around for many years, in 1960, the Ontario Court of Appeal in Canada, in Re Br. American Oil set down a summary of the debate in writing. The essence of this can be summarized as follows; when there is a relationship of landlord and tenant, there must be a reversion in the landlord, the creation of an estate in the tenant, and a transfer of possession and control of the premises to the tenant. Ultimately, the transmission of an estate to the tenant is an essential characteristic of the relationship – there is no transfer of an estate in land to a licensee, and this, on the authorities, is the principal distinguishing trait between the two relationships.
In Camelot Property Management Limited v Roynon , the case concerned property guardians in regards to a licensee or a tenant. Camelot was a property guardian company, their scope of work was to arrange guardians to live in an empty commercial property. The company had arranged for certain persons to occupy portions of a disused elderly person’s care home in Bristol, one such person was Mr. Roynon.
There was a written agreement between the two parties which stated that such an agreement would be a ‘license,’ which would allow Mr. Roynon to have a shared right to occupy the property. The contract, however, did not provide any express reservations in favor of the Company – such as a right of entry. Mr. Roynon was in possession of two specific room keys which other guardians were not in the possession of and were not allowed access as such.
Following this, the Company served notice to quit on Mr. Roynon however, he refused to vacate. The company instigated possession proceedings, and the court had to decide whether Mr. Roynon was a licensee or a tenant.
The court held that Mr. Roynon did, in fact, have exclusive possession, this was in particular relation to the two rooms of the property for which he kept locked. Even though Camelot was able to conduct visual inspections, these did you equate to Camelot retaining the right of access and therefore Mr. Roynon did have exclusive possession of these areas. The restrictions placed on Mr. Roynon in the written ‘license’ agreement restricted only the way in which he used the rooms and were not sufficient to defeat his exclusive possession.
The drafting of a license must be completed with utmost caution. As is seen in the abovementioned case, should a license be construed as a lease (especially in cases where the license is granted for 6 months or longer), such licensee could be capable of claiming as a tenant for the protection provided for under the Landlord and Tenant Act 1954.
The court held that although the intention was to grant a license only, this was not the case and Mr. Roynon ended up with an assured shorthold tenancy under which he was the tenant.
In another 2017 case, namely that of Watts v Stewart , Ashtead United Charity gave Mrs. Watts residential accommodation in one of its properties, namely alms-house. Mrs. Watts was provided with a letter of appointment which stated that she was a beneficiary of the charity. The letter referred to the ‘tenancy’ agreement under which she was required to pay a monthly rental. However, later in that same letter, it provided that no resident would be a tenant of the Charity or have any legal interest in the alms-house.
The Charity later served notice on Mrs. Watts to quite due to her anti-social behavior which was in contradiction of the regulations as per her letter of appointment. The Charity instigated possession proceedings where the court at first instance decided that Mrs. Watts did occupy under a license and not a lease. Mrs. Watts appealed this decision.
The appellant court upheld the decision of the court of the first instance and did not accept that Mrs. Watts had exclusive possession of the flat. Legal exclusive possession allows the occupier to exclude all others, including the owner, from the property and Mrs. Watts did not have this right. She merely had a personal license to occupy the flat subject to various rules and regulations.
One must remember when initiating a lease or license relationship that the intentions of the parties are clearly outlined and that the legal drafting in watertight to ensure that an occupier is not inadvertently given exclusive possession of the whole or part of a property. For a more detailed understanding please feel free to drop an inquiry to one of our lawyers in Dubai or other offices across the UAE and overseas.
The law of lease in South Africa is all-encompassing, there is no distinction between a lease and a license and rather the law of lease caters for all aspects of the utilization of property. The South African law of lease can be broadly defined as a reciprocal agreement between two parties, the lessor and the lessee, in terms of which one, the lessor, binds himself to give the other, the lessee, the temporary use and enjoyment of a thing, in whole or in part, or of his services or those of another person, the lessee, meanwhile, binds himself to pay a sum of money as compensation, or rent, for that use and enjoyment. This law, as is with its Roman counterpart, recognizes three forms of the contract of lease:
- Locatio conductio rei – the renting or hiring of a thing, movable or immovable;
- Locatio conductio operarum – a contract of employment between an employer and an employee; and
- Locatio conductio operis – the contract for the supply of services, like the construction of a building, between an employer and an independent contractor.
Under the location conduction rei, the instances where a person is entitled with a legal interest in a property is covered as well as instances where a person is entitled only to use of such property.
Under South African law, should the lessee not have the exclusive possession of the premises, this will be agreed upon in the written lease agreement (as per the new law, any lease agreements not made in writing will not be valid under the law). Unless they are created as per the common law as considered alternative common-law land-use rights.
Partiarian lease – this is a special lease provided for by the common law which applied to the use of agricultural land where the owner and the lessee agree that the lessee shall farm the land against payment in the form of a certain percentage of the crop or produce.
Under South African law, as per the Roman-Dutch law, there is the concept of servitude. A servitude is a qualified beneficial interested severed or fragmented from the ownership of an inferior property (servient estate) and attached to a superior property (dominant estate) or to some person (personal beneficiary) other than the owner. This concept is used specifically when there is a landlocked property in terms of which there needs to be the utilization of other personal property to enable the owner of the landlocked property to gain access to his land.
In the court case Van Rhyn and Others v Fleurbaix Farm, a company had subdivided its land into two portions. One such portion was completely surrounded by the properties of others. This portion was transferred to Fleurbaix and the other portion, to which was accessible by public road was transferred to Van Rhyn. In this instance, Fleurbaix had an automatic servitude over the property of Van Rhyn to access the public road. After some time, Van Rhyn made alterations to his property which ultimately closed off Fleaurbaix’s access to the road. The judge in the matter stated that the rule of servitude entitled Fleurbaix to the right of way over the adjoining subdivision but the caveat to this is that Van Rhyn could alter the access, provided that such alteration was reasonably in nature. The court determined that the alteration was unreasonable as it completely cut off Fleurbaix’s access to the public road.
In the case of Baker v Gee, Justice Macdonald wrote the following for the determination between a lease and a license:
“Under the general law, and apart from the rental regulations, the relationship of landlord and tenant implies, as one of its essential features, the transmission of an estate or interest from the landlord to the tenant.”
“A license does not create any estate or interest in the property to which it relates. It merely conveys a privilege in the use of the property and makes an act lawful which without it would be unlawful.”
The provision of license here, as well as in the United Kingdom, is governed by the common law, and can be summarised as follows:
- A license provides the licensee with the legal authority to use the licensor’s asset without which such use would be unlawful (for example, trespassing);
- A license may be implied by certain actions;
- A license may be granted by an agent on behalf of the owner;
- Simple licenses, without more, are revocable at the will of the licensor upon reasonable notice;
- Licenses ought to be in writing if possible.
However, when a license is used in a commercial purpose, licensees, individuals using the real property of others under a license, are often called occupants or guests; not tenants. Due to a noticeable precedent of owners and prospective occupants trying to avoid the rigid and often pro-tenant provisions of the residential or commercial tenancy statutes, there has been a movement towards statutes that are all-encompassing. An example of this is the British Columbia Residential Tenancy Act which provides for the following as a definition of a tenancy agreement:
“…an agreement, whether written or oral, express or implied, between a landlord and a tenant respecting possession of a rental unit, use of common areas and services and facilities, and includes a license to occupy a rental unit.”
The attempt by the statute to include licenses into its ambit was however defeated due to its reference to a rental unit which is defined in the statute to mean living accommodation rented or intended to be rented to a tent.
A lease under Indian Law is a grant of property, for a time, by one person who is in possession of a greater interest in the property, the consideration being usually the payment of rent. Whereas a license, on the other hand, is permission to do something on someone else’s property which, without such permission, would be unlawful. The license is governed by the Indian Easements Act. There are many similarities between a lease and license agreement under Indian Law, however, there too are many discernible differences between such. In what follows, will be a composition of the main differences provided for by the law:
- Transferability – where a lease under the law is transferable, there is no transfer of interest with a license. A way of differentiating between these two, would be the transferability of exclusive possession; (however, pursuant to Section 56 of the Indian Easement Act, a license to attend a place of public entertainment can be transferred unless a specific intention is evident);
- Accretions – where the tenant has added to the property or developed the property, such accretions are deemed to be comprised in the lease, however, in terms of a license, there is no property in the land and thus the licensee will not acquire any interest in the accretions;
- A lease is heritable, however, due to a license being a personal privilege, it is not heritable;
- Forfeiture – a lease can be terminated as such, a license cannot;
- Termination – there are eight ways in which a lease can be terminated as per Section 111 of the Transfer of Property Act. A license may be revoked as per the wishes of the parties unless such license is together with a transfer of property and such transfer is in force; or the licensee, acting upon the license, has executed a work of a permanent character and incurred expenses in the execution. Therefore, unlike a lessee, a licensee is not entitled to a notice to quit before eviction;
- Transfer of the property – there is no impact on the lessee’s interest in the property should the property but transferred, however, under a license a subsequent transfer of the transfer will terminate the license.
- A lessee is entitled to maintain a suit in his own name against trespassers and strangers. A license does not create an interest in property in favor of a licensee and, therefore, he is not entitled to maintain suits in his own name;
- Death of either party does not affect a lease, whereas a license is terminated in such circumstances.
The courts were called upon to make a determination of whether an agreement was a lease or a license. In Natesa v. Tungarelu (38 Mad. 83), a person granted another a lease for a period of two years to tap toddy from the trees in his garden, but the person in whose favor the lease was, was not allowed to cut the leaves. This agreement created no interest in the movable property whatsoever, and should rightly be classified as a license.
The question before the Delhi High Court was whether an agreement amounted to a lease or a license. It was provided that the licensee would be entitled to use the premises, but would have no right, title or interest to possess the premises. A license fee per day was to be paid to the owner. Under these circumstances, the Court held that it was a license and not a lease. (Hind Trading & Mfg. Co. v. Didi Modes Pvt. Ltd., A.I.R. 1993 Del.301)
United Arab Emirates
The concept of granting licenses is not recognized in the United Arab Emirates, although it is utilized avidly in business practice. The concepts of granting licenses to occupy premises or concession agreements are not recognised under the UAE law. However, alternative arrangements should be made to ensure that all legal eventualities are covered.
If business utilized license to occupy or concession agreements, they will encounter the following issues:
- Breach of lease terms – as per Article 787 of the UAE Civil Code, a tenant must receive the prior consent of the landlord to sublease. If a business is a tenant and such business grants to a third party a license or a concession agreement, such agreements are not recognized under UAE law, and will more than likely be regarded as a sublease. Without prior consent under these circumstances, a business may be found to have contravened the Civil Code.
- Labour law issues – under the UAE labor law, it is a requirement that the employees work at the registered premises of their employer. Should the employer have entered into a license agreement, instead of a formal lease, then the employer’s right to use the premises as a place of employment may not be recognized. This may be fraught with difficulties when applying for the visa for the employees. Another issue which may arise is when there is an inspection by the authorities and should they find employees of the license holder at the premises, there could be severe repercussions for both the tenant and the license/concession agreement holder;
- Licensing issues – businesses in the UAE must provide evidence to the authorities that they either own or have a valid lease of premises when applying for new commercial licenses and when renewing existing commercial licenses. A license to occupy will not be recognized for this purpose;
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.