Letting residential property - when to use a tenancy agreement and when a licence agreement is more suitable

Article reference: UK-IA-RES01
Last updated: September 2022 | 5 min read

Why it matters whether you use a tenancy agreement or a licence

Social justice within society depends on the government giving additional protection to those who would otherwise be in a weak position.

Land and property has been rented out for hundreds of years, and over time, legislation has been made to give the tenants greater protection. Having a roof over your head (and the ability to generate income for food) are seen as basic rights.

The legislation has resulted in a mountain of regulations, processes, forms, qualifications, and notices to prevent a landlord from wriggling out of their obligations.

The bottom line is that you can call your arrangement a licence (or something else or even nothing at all), but if it looks like a tenancy, the Court will treat it as a tenancy. If it is judged to be a tenancy, the landlord has a deal where they have lost the majority of their rights, but one where the tenant has lost none.

So it is by far best to use the right type of document in the first place.

Terminology: tenancy or a lease

In law, there is no real difference between the meaning of the words 'lease' and 'tenancy'.

However, Acts of Parliament relating to residential occupancy tend to use the word 'tenancy' and those regulating commercial occupancy use the word 'lease'. So we talk about residential tenancy agreements and business property leases.

The difference between a tenancy and a licence is largely about the term 'exclusive possession'. If the house owner says: 'Here you can take over my house to occupy it as if it was your own, for just one year and only as long as you stick to my rules', then you have a tenancy. On the other hand, if the house owner says: 'You can come in and out of this house, only on the days I say it is OK, or only when I am not around', then you have a licence.

From that simple start it has become increasingly complicated. But let us move on to explain the practical effects of this mountain of law.

What deal do you want?

A sensible start is to accept that if you want someone to pay you for living in your house, your deal will almost certainly be a tenancy and not a licence. The law says it is a tenancy unless you can show that it is a licence.

The indications for a licence are:

  • the agreement itself contains none of the usual terms in a tenancy agreement that restrict the parties (what you call the document is absolutely irrelevant)
  • the licensee does not have exclusive possession of any particular space. That is, there is nowhere they can lock the door behind themselves and be sure they alone the right to enter.
  • the owner maintains the property and probably provides furniture, white goods and fittings
  • the owner retains and exercises the right to access any part of the property at any time (the occupier does not have exclusive occupation)
  • the occupier may use the property for specific, limited activities
  • the owner may cancel the agreement at short notice
  • the occupation is for a short period of time - the licence agreement says the licensee must go after say, two weeks
  • the landlord lives in the property as their own accommodation at the same time
  • the licensee does not live there at all times, but irregularly
  • the license fee includes all services. The licensee has no obligation to maintain the premises.

If a conflict arises, the Court will start with the assumption that your deal is a tenancy. It is up to you to prove it is a licence. If you fail, then your problems have begun.

The situation if you accidentally create a tenancy

You will have created a common law tenancy, so cannot take advantage of the assured shorthold tenancy (AST) provisions.

The agreement you have is very limited because you thought it was a mere licence, so you have not provided the usual terms that normally would protect a landlord in an AST. So your tenant will not be obliged to undertake repairs or comply with any other obligations. They will have to wreck the place before you can get them out.

You won't be able to gain vacant possession easily and you cannot increase the rent without following tedious means that are likely to involve legal help with a system designed long, long ago.

So when can I safely use a licence agreement?

Even that simple question cannot be answered with complete accuracy, but you are safe with:

  • a lodger in your home, including a housemate or flatmate (see our licence agreements for residential property)
  • hostel type services
  • holiday accommodation where the occupier has another home and firmly intends to return, preferably within say, 12 weeks.

That means you need an assured shorthold tenancy agreement for everything else, including accommodation where some rooms are shared but each resident has his or her own room with a lock.

What about student accommodation?

Landlords assume that because a student has exclusive possession only of a bedroom, the fact that other facilities are shared must make them a licensee. In some cases that may be true, in other circumstances it will not. Do not risk it. Use an assured shorthold tenancy agreement and put all the tenants on the one document together.

If you let individual rooms, that is a difficult call. It depends on the actual arrangement, but the Court has tended in recent years to prefer an AST - so should you. That means there are no circumstances where you can use a licence agreement safely for student accommodation. We have a longer article about how best to let a room that provides a fuller explanation.

You can find assured shorthold tenancy agreement templates for both these situations.

As a passing comment, do always bring into the agreement all of the people who will occupy your property. That will make them all liable together for rent and compliance with the terms.

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