REALWorld Law

Commercial leases

Types of lease

What types of arrangement does the law recognize which allow occupation and use of real property for a limited period of time?

UK - England and Wales UK - England and Wales

UK - England and Wales

There are two main types of arrangement allowing a person, company or other organization to occupy real estate for a limited period of time without buying it outright.

The first is a lease, which grants the right of exclusive possession of the property for an agreed period of time. A lease confers on the tenant contractual rights and a proprietary interest in the property, which can be transferred to a third party subject to specific restrictions set out in the lease.

The second is a licence which grants permission to occupy the property. Unlike a lease, the occupier of a property under a licence does not have exclusive possession and cannot transfer the licence to a third party. In addition, under a licence the period of occupation does not have to be fixed.

In granting a licence, property owners need to ensure that they are not inadvertently granting a lease. The courts will not consider whether the document is called a lease or a licence but will instead look at the substance of the agreement to determine whether it constitutes a lease or a licence.

Although there is no distinction in law, some very long leases are commonly granted (for example 999 years) at a very low rent. We are not intending to cover these here as they represent a capital interest in a property and do not generate significant or regular income.

The Economic Crime (Transparency and Enforcement) Act 2022 applies to all UK property.  In broad, and simplified, terms, the Act prevents:

  • a landlord which is an overseas entity from granting a lease of more than seven years; and
  • a tenant which is an overseas entity from registering its lease of more than seven years,

unless the relevant overseas entity has first become a registered overseas entity and complied with the updating requirements.  Selling or granting a charge over a leasehold interest is also prohibited.  To become a registered overseas entity, the overseas entity must file information about itself, its managing officers and its beneficial owners (among other things) on the Register of Overseas Entities at Companies House.  Failure to comply with the Act will be a criminal offence punishable by significant fines or, in some cases, imprisonment.