Tag Archives: Period tenancies

Our property lawyers in the Cayman Islands share the important characteristics and differences between leases, licences and period tenancies.

What is a Licence?
A licence is a permission given by the proprietor of land or a lessor which allows the licensee to do some act in relation to the land or the land comprised in the lease which would otherwise be a trespass, but does not include an easement or a profit.[1]

Typically used to permit non-exclusive occupation of a property on a short term basis, true licences merely create a personal right, providing permission for a licensee to do something on a licensor’s property, such as occupy the property, and do not transfer a proprietary interest.

Access arrangements pending a binding contract
It is not unusual for a prospective tenant or purchaser to require early access to a property (for example to start trading or fitting out the premises) whilst in the process of agreeing documentation such as a lease or purchase agreement and pending completion of same. Such early access may also be granted under the terms of a carefully drafted licence to occupy.

What is a Lease?
A lease is both a contractual relationship and an estate in land, and therefore capable of existing independently of contract. There are many types of leases and ways of describing them. However, generally where a document has any of the following characteristics, it will likely be construed as a lease:

(i) It grants exclusive possession;
(ii) It is for a fixed term (i.e. period of length of tenancy); and/or
(iii) It provides for payment (i.e. rent).

Exclusive possession
The distinguishing feature of a lease is that, unlike with a licence, the tenant or lessee has exclusive possession of the let property.[2] A person has exclusive possession if he can exercise the rights of the landowner and exclude both the landlord and third parties from the land (i.e. exclusive occupation of accommodation).

Notably, possession is not the same as occupation: a tenant or lessee may have possession by virtue of being able to receive the rents and profits of the land (reflecting the right of ownership) but the person in occupation could be the sub-lessee to whom the lessee has granted a sub-lease.

What about a periodic tenancy?
A periodic tenancy is a tenancy from year to year, half year to half year, quarter to quarter, month to month, week to week or the like.[3] A periodic tenancy is deemed to exist where:

(i) in any lease the term is not specified and no provision is made for the giving of notice to terminate the tenancy, the lease shall be deemed to have created a periodic tenancy;[4] or
(ii) the proprietor of land permits the exclusive occupation of the land or any part thereof by any other person at a rent but without any agreement in writing, that occupation shall be deemed to constitute a periodic tenancy;[5]

For periodic tenancies created by (ii) above, the period of the period tenancy shall be the period by reference to which the rent is payable, and the tenancy may be determined by either party giving to the other notice, the length of which shall subject to any other law, be not less than the period of the tenancy and shall expire on one of the days on which rent is payable.[6]

Notably, as with leases or agreements for leases for a term not exceeding two years, periodic tenancies do not need to be registered.[7]

Will labelling an agreement a licence make it a licence?

Importantly, just because a document purports to create a “licence” does not mean that it will be construed as a licence instead of a lease. Calling a lease a licence does not make it so. The court will analyse the form and terms of the agreement along with the substance of the rights and obligations created under the agreement when deciding whether it is a licence or a lease.

The fact that the “licence” is for a fixed period of time does not necessarily prevent it from being a licence, as a licence can be for a fixed term. Similarly, if the licensee is required to make a payment under the licence (which the parties call a “licence fee”), this will not necessarily prevent the arrangement from being regarded as a licence.

Where there is a written agreement documenting rights of occupation, it is a question of construction as to whether there is a tenancy or a licence to occupy. The court will consider the agreement as a whole. It has been held that the court should not award marks for drafting or attempt to determine whether general clauses in a written agreement are more like clauses found in a tenancy or a licence. Instead, the owner’s rights and powers should be evaluated “together and cumulatively” in determining whether an agreement contains a grant of exclusive possession.[8]

Advantages and Disadvantages of Each Arrangement:

Leases

Advantages	Disadvantages
Offers landlords protection from spurious claims by tenants that they can remain in the premises following expiration of the lease. Such claims can be expensive and time-consuming to defend and can delay any plans the landlord has for the premises.	Leases (even for a short term) tend to be longer documents than a licence to occupy or a periodic tenancy. It takes more time to negotiate the terms and document them. The costs associated with producing a lease are likely to be higher than those associated with producing a licence or periodic tenancy.
Confers a secure period of income for the landlord	Stamp duty may be payable on the lease (see below)
Flexibility for both parties can be introduced into the lease by the insertion of a mutual break clause.
A lease offers security and certainty for the tenant as an occupier of land. The landlord generally has limited rights of access.

Periodic Tenancies

Advantages	Disadvantages
The landlord can terminate on fairly short notice, thereby easily retrieving possession of the premises from the occupier. Likewise the tenant can terminate on fairly short notice.	Periodic tenancies can be determined fairly quickly; that is the very essence of the arrangement. Consequently, they may not offer enough security and certainty for an occupier of land.
They do not need to be registered, and therefore, there is no stamp duty payable.	Because the arrangement can be determined fairly quickly by the occupier, from a landlord’s perspective, they do not confer a secure period of income which can be relied upon. Likewise, from a tenant’s perspective, they do not confer a secure occupation.

Licences

Advantages	Disadvantages
Generally, a licence is a shorter document than a lease and can be prepared and completed more quickly and therefore more cheaply.	Despite the document being labelled a licence, if exclusive possession is in fact granted, there is always the risk for a landowner that the arrangement may later be challenged by the occupier. If so, a landowner could be exposed to a claim that the licence is really a lease.
There is a little more security where an occupier occupies premises as a licensee, rather than as a tenant under a periodic tenancy, as a periodic tenancy can be determined fairly quickly.	An occupier generally does not have the same degree of control over the land as it would have if it were granted a lease. A licence is a personal privilege: it makes lawful that which would otherwise be unlawful.
The circumstances in which a party may determine a licence depend on the terms of the licence, and a licensor will not necessarily be able to determine the licence at will. [9]	A licensee’s occupation is precarious. [10] If the landowner sells the land (even to a group company), the licence will end, although the licensee may have a right of action against the original licensor for breach of contract. A licence offers little security.
A contractual licensee is entitled to the occupation that the contract provides and where the contact is determinable on notice, the licensee is entitled to the notice that contract provides.	A licence relating to the use or enjoyment of land is ineffective against a bona fide purchaser for valuable consideration unless the licensee has protected his interest by lodging a caution under that section. [11]
As a licensor cannot determine a contractual licence in breach of contract, proceedings for possession must not be brought before the licence has expired.
There is no stamp duty payable.

Stamp Duty
Stamp duty is payable on any document described as a lease, tenancy, agreement to lease, licence (where exclusive possession is granted), or any other document which grants leasehold title to a property.

There are severe penalties for the late-stamping or non-stamping of instruments required to be stamped.[12] As such, it is important to ensure that stamp duty is paid where required, and that when in doubt, legal advice is sought regarding the nature of the agreement and whether stamp duty is payable. Pursuant to the Stamp Duty Law (2019 Revision) (“SDL”), stamp duty is payable on all written documents[13] which convey or transfer a proprietary interest, including a leasehold interest[14] of a parcel or parcels of land. Stamp duty is payable on any document described as a lease, tenancy, agreement to lease, licence (where exclusive possession is granted), or any other document which has the effect of granting the right to use property for a fixed or defined period of time, other than perpetuity (i.e. leasehold title to a property).

How much Stamp Duty is payable?
Leases are subject to a stamp duty assessment to establish the amount of ad-valorem stamp duty payable. Stamp duty is payable on the average annual rent over the term (i.e. the length of the lease) or the market rent,[15] whichever is higher.

The rate of stamp duty payable is dependent on the lease term. When determining the term of the lease any provisions or options within the lease for extending the lease term must be included.[16]

Rates based on Lease Term

TYPE OF LEASE	RATE
For a lease term of 5 years or less, where no premium is payable	5% of the Average Annual Rent, or Assessed Market Rent, whichever is higher
For a lease term of between 5 years and 10 years, where no premium is payable	10% of the Average Annual Rent, or Assessed Market Rent, whichever is higher
For a lease term of between 10 years and 30 years, where no premium is payable	20% of the Average Annual Rent, or Assessed Market Rent, whichever is higher
For a lease term of 30 years or less, where a premium is payable	As above plus duty assessed on a Transfer of Land on the value of the Premium
For a lease term of over 30 years	Assessed on the Market Value of the Freehold interest at Duty rate for a Transfer of Land

Payable by?
Under the Stamp Duty Law, in respect of any “conveyance or transfer of land, strata title or interest therein” the transferee must ensure that the relevant instrument is filed and the duty paid. With leases, the tenant or lessee is under the statutory obligation to pay the stamp duty within forty-five (45) days of the grant of the lease. Notably, however, the parties can negotiate who actually pays the stamp duty.

Penalties
The law prescribes severe penalties for the late-stamping or non-stamping of instruments required to be stamped.[17] As such, it is important to ensure that stamp duty is paid where required, and that when in doubt, legal advice is sought regarding the nature of the agreement and whether stamp duty is payable.

Thinking of leasing or licencing your residential or commercial property?
Contact our property team at HSM and we can guide you on the more suitable option for your needs and assist you with drafting, reviewing documents, negotiations and registration where necessary.

Footnotes

[1] Section 2 of the Registered Land Law (2018 Revision)
[2] Street v Mountford [1985] AC 809
[3] Section 2 of the Registered Land Law (2018 Revision)
[4] Section 45(1) of the Registered Land Law (2018 Revision)
[5] Section 45(2) of the Registered Land Law (2018 Revision)
[6] Section 45(3) of the Registered Land Law (2018 Revision)
[7] Section 28 of the Registered Land Law (2018 Revision)
[8] Esso Petroleum Co Ltd v Fumegrange Ltd [1994] 2 EGLR 90
[9] Colchester and East Essex Co-operative Society v Kelvedon Labour Club [2003] EWCA Civ 1671
[10] Per section 98(1) of the Registered Land Law (2018 Revision), without prejudice to section 127, a licence is not capable of registration.
[11] Section 98(2) of the Registered Land Law (2018 Revision)
[12] Section 22 of the Stamp Duty Law (2019 Revision)
[13] Notably, as stamp duty is only payable on written documents, oral agreements providing exclusive possession will not attract stamp duty. Accordingly, oral lease agreements can be attractive to those seeking to avoid stamp duty or for those seeking the simplicity and ease of such arrangements. However, there are inherent disadvantages to such agreements, especially if there are any disputes or there is ever any need to clarify the terms of the agreement. It has been said that oral agreements are not worth the paper they are written on.
[14] Whether or not it is registerable with Lands and Survey
[15] Lands and Survey’s Valuation and Estates Office will undertake a Market Valuation to establish the Market Rent.
[16] The calculation for ‘length of lease’ does not include any ‘option(s) to renew’, only to ‘options to extend’.
[17] Section 22 of the Stamp Duty Law (2019 Revision)

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