Leases and licences are an integral part of land ownership in Australia. These arrangements allow landowners to grant rights to other persons to occupy their land for rent or a fee. Although both these arrangements are widely known and utilised, there are vital differences between them which are, in some circumstances, misunderstood. This can have undesirable consequences, especially for landowners who believe they have granted a licence to a licensee, but have mistakenly granted a lease. This article will outline the definitions of these arrangements, discuss cautions and will summarise the similarities and differences between them for clarification.
A lease is an interest in land granted by a landowner (referred to as “landlord” or “lessor”) to another person (referred to as “tenant” or “lessee”), which confers a right of exclusive possession over the land for a fixed duration.
The primary difference between a lease and a licence is that a lease grants the tenant or lessee the right of exclusive possession. Exclusive possession is “the very essence of the proprietary interest conferred upon a lessee by a lessor”, and allows a lessee to use the land to the exclusion of others, including the landlord (subject to the terms of any lease granted). This interest can be registered on title to the land, affording the lessee the protection of the NSW Torrens Title Register.
Exclusive possession is an attractive quality in choosing a lease over a licence, especially in circumstances where the tenant is conducting a business that requires security of occupation and minimal interruption i.e. a retail shop or commercial office. However, there may be circumstances for landowners and other persons alike where a licensing arrangement may be more suitable.
In relation to property law, a licence is a right to occupy land without any interest in the land being granted. As such, a licence is not a proprietary interest that can be registered on the title to the land. This means licences do not afford the same protections that leases do, and are therefore an inferior form of occupation. Although this is the case, licensing arrangements can be attractive in circumstances where a licensee may want a short-term, flexible arrangement that can be ended on short notice. A landowner may also desire this where there is a short-term event, during which, they require ongoing access to the property.
An example may include a food truck at a music festival. At these events, a landowner is normally required to serve food. To meet this requirement, the landowner may grant licences to food truck businesses to occupy part of the land to provide food. In such circumstances, the exclusive possession granted by a lease would be inappropriate, as a food truck business would be sharing with other businesses and the landowner would require ongoing access to the land to ensure the event is running smoothly. It would also be impractical due to the short-term nature of the event, which is usually no more than a day.
Below is a table summarising the similarities and differences between leases and licences as discussed above:
One of the major cautions with licensing arrangements is that they can, in some circumstances, be deemed to be a lease (and vice-versa). This is because Courts construe these arrangements based on the substance of the relationship between the parties, regardless of the form or the name of the document used to create the legal relationship.
For example, in the often-cited case of Radaich v Smith, the landowners granted a “licence” to a person operate a milk bar for 5 years. Even though the licence deed used terms normally used in a licensing relationship, the High Court ultimately looked at the substance of the agreement between the parties and found that the landowner had actually granted exclusive possession of the land to the milk bar operator for a fixed duration. Therefore, a lease, rather than a licence, had been granted in the circumstances, thereby amplifying the rights of the now lessee.
In contrast, cases such as Lewis v Bell have found that even where a licensing agreement had terms restricting access by the landowner and the “giving up of possession” at the end of the licence term, this could not be construed as a lease. This is because the Court found – based on multiple factors – that exclusive possession of the premises had not been granted. In reaching its conclusion, the Court looked at factors such as the sharing of the facilities, the prevention of assignment and the limited purpose for which the “use” of the property was licensed.
Understanding the difference between a lease and a licence is crucial for landowners seeking to grant a right to another person to occupy their land. Each case will turn on its own facts, so it is vital that landowners and occupiers alike seek professional advice from a qualified lawyer to ensure they choose an arrangement that suits them best and reflects the substance of the relationship between the parties.
This article was co-written by Lawyer, Jack Harman.
This article is not legal advice. It is intended to provide commentary and general information only. Access to this article does not entitle you to rely on it as legal advice. You should obtain formal legal advice specific to your own situation. Please contact us if you require advice on matters covered by this article.