The End of Section 21 – Protecting Your Position – Licenses

This is part of a series of articles for landlords on preparing for the removal of the no-fault ground for possession under section 21. 

Part 6. Licenses

If as a landlord you are unhappy about the restrictions placed on you when renting properties under a tenancy – the obvious answer seems to be to grant licenses instead.

Then you will be able to evict tenants relatively easily, without having to give a reason and avoiding the problems with the section 8 notice process.

But is this possible? Let’s take a look at the law.

What is a residential license?

A residential license is where someone is granted leave to use a property but does not have a tenancy.

• A tenancy (or lease) is a legal interest in land – a ‘term of years’ – one of the two forms of legal interest in land permitted under the Law of Property Act 1925. It comes with a plethora of rules and regulations.
• A license, on the other hand, is not a legal interest in land. Occupiers have a contract which allows them to use the property – so that they are not a trespasser.

So this means:

• Landlords are not bound by the repairing and fitness obligations under the Landlord & Tenant Act 1985
• Deposits do not need to be protected under a scheme (as these only apply to assured shorthold tenancies), and
• Licensees are easier to evict as they do not have the protections which come with a tenancy

That is not to say that licensees have no rights at all. They do. For example, landlords must normally serve a properly drafted Notice to Quit, giving a minimum of 28 days notice, before any eviction proceedings can be started.  Also, licenses are included within the Tenant Fees Act rules.

However, on the whole, where they exist, licensees do have considerably fewer rights than tenants.

The trouble is (for landlords) that they are not easy to create.

The presumption against residential licensees

The law on this stems from a famous case from 1988 called Street v. Mountford. At this time rented properties were governed by the Rent Act 1977 where tenants had very strong rights and were often impossible to evict.

Mr Street rented rooms to Mrs Mountford, under an agreement which specifically stated that she accepted that she was renting under a license rather than a tenancy. However, when Mr Street tried to evict her, she alleged that despite this statement, she did, in fact, have a tenancy.

The House of Lords agreed with her and the case is an authority for occupiers having tenancies, notwithstanding statements to the contrary in any written agreement, if the occupier

• Has exclusive possession of the property
• Pays rent (which does not have to be a market rent),
• For a term (a specified period of time, which can be ‘periodic’ ie from week to week or from month to month)

So in most cases, whatever the landlord and the occupier may agree between them, an occupation will be a tenancy.

However, there are some circumstances where a license will be created.

A license will be created if:

• The ‘property’ is a boat – as a tenancy can only be created in respect of a building on land
• The occupier is required to live in the property for their job – for example live in nannies, caretakers, gamekeepers etc (these are known as service occupancies)
• (Sometimes) if the occupiers right to live in the property is because they are a beneficiary under some form of charitable trust, and
• If they are not given ‘exclusive occupation’.

It is the last exception which is most commonly used where landlords try to create licenses instead of tenancies.

Excluding exclusive occupation

There are two main ways that landlords do this

1. Providing services, such as cleaning, where the landlord or his agents can enter the property as of right, and
2. Reserving the right to move occupiers from one property to another (normally this will be from one room to another where occupiers rent a room in a shared house).

1 Providing services

If you are looking to create a residential license, your best option is to provide services.

Probably the most common is room cleaning and provision of clean sheets and towels – this is why hotel rooms cannot normally be tenancies.

However for this to ‘work’ the services have to actually be provided. If a ‘license agreement’ provides for weekly cleaning of a room, it must have a weekly clean. If in fact the landlord has provided no cleaning services for several years – the occupier will almost certainly have a tenancy.

2 The right to move the occupier

This is another clause commonly included in license agreements. For example in property guardian agreements. However again, if the landlord has never in fact ever moved any of the occupiers it is likely to be considered a sham.

‘Licenses’ which are not licenses

The main problem with trying to set up a license where normally occupation would be a tenancy is that you may not succeed. This could have the following unwelcome consequences

• You could be prosecuted and fined for issuing a ‘sham license’
• Eviction proceedings will fail if the Court hold that the agreement is in fact a tenancy (as happened to Mr Street in Street v. Mountford)
• If you have taken a deposit and not protected it, you will be vulnerable to claims for the penalty
• If you have not complied with the tenancy legislation, such as serving a gas safety certificate before tenants move in, you will not be able to use section 21 to evict until you have dealt with the issues – if you can.

Conclusion

It is perfectly possible to rent out properties as residential licenses – provided you comply with the rules.

For example there are a number of landlords who rent out high quality properties as ‘serviced accommodation’ quite successfully.

On the whole their occupiers are happy because the services provided make their lives easier and the lack of security of tenure often works for them too as it means that they can vacate with minimal notice. Not everyone wants to stay in a property for years on end.

Where the problems arise is where landlords try to create a license situation without providing the service element which is essential for this occupation type.

So if you are considering renting out property on a license basis, you are far less likely to be challenged if the property is a high value let with generous services to make occupiers lives easier. If in fact, the service element is a major part of the package that occupiers enjoy.

However if you are trying to let on a ‘license’ basis simply because you want to avoid the obligations which come with renting property on a tenancy, you are more likely to fail in your endeavour and face prosecutions and penalties for non-compliance with the law.