Difference Between Lease And Licence: Why It Matters
As William Shakespeare pondered centuries ago, “What’s in a name?”
Shakespeare may have been prophetic – in a modern legal context, the name given to a document or agreement may not reflect its true nature. If you have permission to use someone else’s land for a particular purpose, you may have entered into a written agreement with the landowner which sets out the terms and conditions of your occupation. The agreement may be called a licence or licensing agreement suggesting that you have a personal right to enter and use the premises.
However, on closer inspection, your so-called licence could turn out to be a lease giving you an interest in the land itself together with the rights and responsibilities of a tenant.
In these circumstances, the judicial view is that substance takes precedence over terminology with courts examining the true nature of the agreement rather than its language to ascertain the genuine intentions of the parties.
Clarifying the practical difference between a lease and a licence could help you to determine your rights and obligations and avoid costly litigation in the long term.
Lease vs. Licence – the Practical Difference
The key distinction in the difference between a lease and a licence is that a lease affords the tenant or lessee an interest in the leased premises which is manifested in the right to exclusive possession (see the case of Radich v Smith [1959] HCA 45 discussed further down).
Exclusive possession entitles the tenant to remove unwanted visitors (potentially including the landlord) during the term of the Lease.
By contrast, a licensee merely has a licence agreement to occupy the property and has no right to exclude others during the licensee’s period of occupation.
To highlight the difference between a lease and a licence, we have provided a selection of the rights and responsibilities of a tenant under a lease contrasted with those of a mere licensee who does not have the same interest in the land:
Common Law Right to Sue an Intruder in Trespass
Tenant under a lease: As discussed, a lease entitles the tenant to ‘exclusive possession’ of the Premises, which includes the right to expel an unauthorised visitor. This means that the tenant may have an action in trespass against the landlord if s/he enters the land without the tenant’s consent and without authorisation under the terms of the lease.
Licensee under a license: No such right of exclusion is available – the owner / licensor of the land may be free to enter the land at will.
Registration of Lease – Protection Against Competing Interests
Tenant under a lease: A long-term lease (for a term exceeding 3 years) in Queensland must be registered on the title in order to “transfer or create an interest in the lot”. See Section 181 and 182 of the Land Title Act 1994 (Qld). In the Queensland context, registration is optional for short-term leases of 3 years or less. Once registered, it will enjoy the protections of indefeasibility, meaning that the tenant’s interest in the land will take priority over other, unregistered instruments.
Licensee under a license: A licence cannot be registered and therefore it does not vest the licensee with an interest in the land.
Obligation to Pay Rent and to Keep in Repair
Tenant under a lease: Section 105 of the Property Law Act 1974 (PLA) provides that the tenant is obliged to pay the agreed amount of rent and keep the premises in good repair (except in the case of fire, flood or similar event rendering the premises unfit for the purpose). This provision can be excluded or modified by the express words of the lease.
Licensee under a license: The licensee’s repair and maintenance obligations, and the amount of rent payable, will depend upon the terms of the licence.
Breach of the Obligation to Keep the Premises in Good Repair
Tenant under a lease: If the tenant breaches this repair obligation, under Section 112 of the PLA, any damages recovered by the landlord must be proportionate to the resulting decrease in the value of the premises. The landlord cannot forfeit the lease for a failure to repair without complying with the Section 124 notice requirements (see below).
Licensee under a license: The licensee’s repair and maintenance obligations, and the amount of rent payable, will depend upon the terms of the licence.
Repair Obligations Will Depend Upon the Terms of the Licence
Tenant under a lease: Section 107 of the PLA allows the landlord a limited right of entry to view and make repairs to the leased premises (representing an exception to the tenant’s right of exclusive possession). However, this can be excluded by the express terms of the lease.
Licensee under a license: The licencor can generally enter the premises at any time and for any purpose (whether to make repairs, view the premises or otherwise). If the licensing agreement limits the licensor’s capacity to enter the premises, the license may constitute a lease.
Right to Assign or Sublease to a Third Party
Tenant under a lease: Per section 121 of the PLA, the landlord cannot ‘unreasonably’ refuse to consent to the proposed assignment or sublease. This section cannot be excluded by the express provisions of the lease, but will only operate in circumstances where the landlord’s consent is expressly required.
Licensee under a license: The licensee has a mere personal right to use and occupy the property, and is not able to enter into an assignment or sublease unless the express terms of the licence agreement allow it.
Right of Forfeiture / Re-entry
Tenant under a lease: Section 124 of the PLA provides that if the tenant is in breach, the landlord cannot forfeit the lease and retake possession of the premises without first giving the tenant notice of the forfeiture and a reasonable time to rectify the breach or pay any ‘reasonable compensation’ for the damage. (However, this protection is not available for leases / tenancies of 1 year or less.)
Licensee under a license: A licensee enjoys no such protection. In theory, a licence may be terminated at the will of the landowner / licensee even though contractual damages may apply.
Subdivision Approval Requirements Under the Sustainable Planning Act 2009 (Qld)
Tenant under a lease: A lease of part of a lot (that is not part of a building) for a term exceeding 10 years (including options to renew) will constitute a ‘reconfiguration of a lot’ requiring subdivision approval from the local authority.
Licensee under a license: Not so for licences.
Shared Occupancy
Tenant under a lease: A lease affords the tenant an exclusive right of possession and is therefore unsuited to shared use / occupancy.
Licensee under a license: A licence is suitable to shared use (making it appropriate for a number of arrangements our church clients enter into).
Case Law: Radich v Smith – Lease or Licence?
In the case of Radich v Smith [1959] HCA 45 (“Radich’s case”), a small business owner, Maria Radich, entered into a deed of agreement to operate her milk bar out of a lock-up shop in Sydney’s Mossman area.
Under the terms of the agreement, Ms Radich was granted the “sole and exclusive license and privilege to supply refreshment to the public…and to carry on the business of a milk bar.”
However, despite the use of the term licence, the High Court ultimately found that Ms Radich had been granted a lease of the premises for the agreed period.
Justice Windeyer held that, “I imagine all concerned would have been astounded if they had been told that the appellant [Ms Radich] had no right to exclude persons”, especially given that the premises was a lock-up shop and therefore not readily accessible to others outside Ms Radich’s business hours.
His Honour further noted that it would be equally astonishing if the owners of the shop were able to “licence other people to carry on any activity there” provided only that this did not interfere with Ms Radich’s business operations.
Clearly, Ms Radich was implicitly entitled to remove unwanted visitors and to conduct her milk bar business without unauthorised entry or interference. This gave her a right to ‘exclusive possession’ of the premises for the term of her occupation, an arrangement more consistent with a leasehold interest. She was therefore entitled to have her rent determined by the Fair Rents Boards (one of the protections afforded to tenants in New South Wales at that time).
Determining the Parties’ Intentions
Justice Windeyer noted that the difference “between a lease and a licence” is ultimately “a question of intention.”
But, His Honour proceeded to say:
Intention to do what? Not to give the transaction one label or another. Not to escape the legal consequences of one relationship by professing that it is another. Whether the transaction creates a lease or a licence…depends upon the nature of the right which the parties intend the person entering upon the land shall have in relation that land.
His Honour therefore acknowledged that language has the potential to mislead – certain terms may be adopted, sometimes unconsciously, sometimes with the deliberate intention of concealing the true nature of the parties’ agreement and evading the attendant legal ramifications.
Therefore, even if your agreement is called a lease (or a licence), this is not necessary conclusive. It is essential to consider the entire agreement (not just isolated terms) in order to determine the rights and interests the parties intended to create.