Different types of tenancy: which agreement should you use?
Technically in law, there is no difference between the terms "tenancy" and "lease".
However, statutes relating to letting residential property most often use the word "tenancy", while those regulating commercial occupancy use the word "lease".
As a result, we all tend to follow that usage. So we talk about residential tenancy agreements and business property leases.
A tenancy is a right to exclusive occupation of a residential property. The landlord cannot enter the property without permission from the tenant, or very good reason.
A licence grants more limited permissions to use a property for certain pre-agreed purposes only.
The contract for each records the terms of the deal.
Tenants have many rights that cannot be removed by using a licence agreement if the situation is one of tenancy.
Many landlords have realised that licence agreements don't have some of the onerous terms in them that tenancy agreements do, particularly relating to ending the agreement. They make the mistake of using a licence agreement.
However, the test of whether you have a licence or a tenancy doesn't depend what is written in the contract, or whether you're letting a room or a whole property, but rather how the deal works in practice.
However, if the wrong type of document is used, the effect is likely that the tenant will keep all of his or her rights, and you the landlord will lose many of yours, including those relating to being able to seek possession without the tenant being at fault. Many of the protections that a landlord is given in law will not apply if a licence agreement is used.
It is crucial to choose not only the right type of document, but a document that will protect you as well as possible within the framework of the law.
A licence is the best document if the person letting the property is sharing accommodation on a temporary basis. In that situation, the licensee does not have exclusive occupation of the property or of his or her part of the property.
For example, a licence agreement might be used for:
- a lodger in your home
- hostel type services
- short-term holiday accommodation
If you need a residential licence agreement, look at our agreement for a lodger.
- the landlord does not live in the property for the majority of the time
- the landlord does not share use of facilities (such as cleaning facilities) and space (such as a lounge)
- some rooms, such as a bedroom, are for the exclusive occupation of the tenant and not the landlord
- the tenant can invite anyone else to live with him or her
- the tenant can lock the landlord out of his or her room
You need a tenancy agreement for every other residential letting situation. The most common type is an assured shorthold tenancy agreement (mostly abbreviated to AST).
You can download an easy to edit template agreement from Net Lawman pre-customised to the type of property you are letting, such as one for a furnished flat.
Under an AST:
- the tenant has exclusive occupation of all or part of the property, giving the tenant privacy and preventing the landlord from entering without advance permission
- the landlord charges a market rent, usually fixed for the term of the tenancy
- special rules apply as to the notice to be served to obtain possession, even on expiry of the agreed term
There are situations where an AST is unsuitable. These include:
- rents over £100,000 a year (use contracts that are regulated by common law)
- if the occupation of the property is tied to being employed by the owner (use an agreement for service occupancy)
- when you rent to a company, not a private individual (use company let agreements)
- if a business will be run from the property (use lease agreements for business property) Note: working from home for a business registered elsewhere is fine under an AST.
- if the property has more than 2 acres of agricultural land (use agricultural leases)
To complete the picture,the full list of tenancy types which are expressly excluded from qualification as an assured shorthold tenancy inlcudes ones that are:
- granted to a company or an organisation (e.g. tenant is a housing association or a limited company). Assured and assured shorthold tenancies may only be granted to an individual or in the case of a joint tenancy, joint tenants where the tenants are individuals. (Housing Act 1988, s.1);
- granted by a resident landlord. A resident landlord is defined as one who continuously lives in the same property as his tenant. A landlord living in a separate flat or house converted into flats in which his tenant(s) live(s) may be a resident landlord. A landlord living in a separate flat in the same purpose-built block of flats as his tenant is not a resident landlord;
- subject to Part II of the Landlord and Tenant Act 1954;
- allowing the tenant to occupy the property for a holiday (use a holiday property rental agreement)
- granted by an educational body specified within a list issued by the Secretary of State to a student studying at that same institution
- in which the landlord is the Crown or a Government Department
- that is classed as a protected tenancy under the Rent Act 1977 or the Rent (Agriculture) Act 1976
- entered into before 15 January 1989, or arising as a result of a contract entered into before then
- of a licensed premises (a pub or bar)
- where the landlord is a local authority, a housing action trust, certain specified statutory bodies or a fully mutual housing association (unless they are old style assured tenancies with rent below £100,000 per year that have been converted to assured shorthold tenancies)
- rent-free or where the annual rent is less than two thirds the rateable value of the property
If you are interested in reading more about landlord law, we have a legal guide to the law on residential tenancies that provides a good overview.
Please note that the information provided on this page:
- Does not provide a complete or authoritative statement of the law;
- Does not constitute legal advice by Net Lawman;
- Does not create a contractual relationship;
- Does not form part of any other advice, whether paid or free.
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