Licence Agreement vs Tenancy Agreement: Complete Guide

The legal status of whether an agreement is a tenancy, or a licence makes a significant difference, as they represent two separate types of contracts. When determining which type of agreement to use in a particular situation, several factors must be taken into consideration. The distinction between licences and tenancy agreements is particularly important in the student accommodation sector.

What is a tenancy agreement?

A tenancy is a legal interest in land for a set period of time, providing the tenant the exclusive legal right to occupy a property.

The key features of a tenancy include:

• Exclusive possession: This grants the tenant the right to prevent others, including the landlord, from entering the rented premises without their permission. The tenancy agreement will usually give the landlord a right to be given access by the tenant in certain circumstances, usually with a requirement that the landlord first gives notice.
• Rent: A tenancy is a form of contract and almost all tenancies will require the tenant to pay rent.
• Defined period of time: The term of a tenancy can either be fixed term, which sets out the length of the tenancy from the outset, or periodic, which is a rolling tenancy with no fixed term.

A tenancy agreement is a contractual arrangement requiring both a landlord and a tenant who intend to enter into legal relations.

One of the most common types of tenancies are Assured Shorthold Tenancies, which are generally granted by private landlords, providing statutory protection to tenants. Tenancies granted by universities to students are excluded from this status, but that exclusion does not extend to private accommodation providers.

What is a licence agreement?

A licence allows someone to enter and occupy a property without owning it. If a licence is terminated and the former ‘licensee’ (the person granted the licence) fails to leave the property, they become a trespasser. However, it is worth noting that most licences are contractual agreements, meaning that they cannot be revoked at will.

There are two different types of licence:

• Bare licence: Where someone has been given permission to live in a property. For example, an individual is invited to stay with extended family.
• Contractual licence: Where someone has been granted permission to occupy a property under a contract. This arrangement typically involves the licensee providing a service or payment for accommodation, but it falls short of meeting the conditions required to establish a tenancy.

Why does it matter whether you use a tenancy or a licence agreement?

Understanding whether a tenancy or licence agreement is in place is crucial for landlords, as it determines the legal rights and protections for both parties. It is important to get it right to avoid legal issues down the line.

Legislation has evolved to provide tenants with greater security and protection. Even if an agreement is labelled as a licence, if it resembles a tenancy, courts may treat it as such, granting tenants more rights and fewer for landlords.

The Court of Appeal judgment in the case of Addiscombe Garden Estates v Crabbe (1958) sets out the test:

“(if) the right conclusion appears to be that, whatever label may have been attached to it, it in fact conferred and imposed on the grantee in substance the rights and obligations of a tenant, and on the grantor in substance the rights and obligations of a landlord, then it must be given the appropriate effect, that is to say, it must be treated as a tenancy agreement as distinct from a mere licence.”

With a tenancy agreement, tenants have more control. They can decide who enters the property, sublet, and it can involve a complex and lengthy eviction process to repossess the property. The landlord has a range of responsibilities implied into the contract by law, such as repair and maintenance obligations.

On the other hand, a licence agreement is simply giving someone permission to use a property which makes it easier to end and is often far more informal than a tenancy agreement.

When to use a tenancy or licence agreement?

A licence is typically used for short-term occupation, for example, for several weeks or months, or where the licensee does not have exclusive occupation of the property, for example, a hostel room, a parking space, or a booth in a shopping mall.

Student accommodation is often provided under a licence as this is more flexible for the landlord.

Ensuring that the accommodation provided genuinely constitutes a licence and not a disguised tenancy is crucial for landlords. Even meticulous drafting cannot shield a landlord if they are, in reality, granting sham licence agreements. In such cases, landlords have faced prosecution for breaching consumer protection laws.