Difference between Lease and Licence: Effect of Exclusive Possession Clause

This article is a brief introduction of the difference between ‘lease’ and ‘licence’, in most possible simple words for the understanding of common members of the community.

Before comparing the ‘lease’ with licence the word ‘licence’ needs some understanding and clarification. There is no confusion for a legal professional but for a common man it may be difficult to differentiate between a lease and a licence.

The term ‘lease’ is widely understood as a right to use another’s land for a certain period against settled consideration on agreed terms and conditions.

The law dictionary meaning of the licence is “A permit to do something that would otherwise be unlawful1.”

The dictionary meanings of the word ‘licence’ are not different than to the common understanding of a common man because for a common man the first thought of the word licence is a permit to do something not necessary with a reference to any property or the property of another. For example; licence to drive, licence to have fire arm and licence to do a controlled or regulated business.

The sort of ‘licence’ I am discussing with ‘lease’ is the authorisation to use another’s property. This is the same authorisation that is widely known as ‘lease’. For legal purposes the both are different.

The understanding of some basic knowledge of the difference between lease and licence is necessary because the responsibilities and obligations of a licencee are different than to the responsibilities of a lessee. Similarly, the responsibilities and obligations of a landlord or owner are different.

The quantum of the consideration may not necessarily be different in case of lease or licence but it may have significant consequences if any dispute arises. The forums to get settle the disputes are different.

The legally mandatory terms of the contract and the payment of government taxes my significantly be different.

For example, in Indian law grant of property for a period of time against consideration is a lease and the consideration is known as rent. The relevant law is Transfer of Property Act 1882.

Whereas in Indian law a licence is a permission to do something on someone else’s property. A licence is regulated by Indian Easement Act.

In Australia a licence to use another property my not necessarily be registered but a lease is to be registered. Except in Victoria, a lease of a Torrens title should normally be registered; for example Real Property Act 1900 (NSW) s 41, contrast Transfer of Land Act 1958 (Vic) s 42(2)(e).

Generally, lease is transferable, but the licence is not transferable but under section 56 of the Indian Easement Act a licence to attend a public place of public entertainment can be transferred, unless a specific intention is evident.

Transfer of the property itself has no effect on the rights of a lessee but transfer of the property will terminate the licence.

In RADAICH v. SMITH (1959) 101 CLR 209, the Australian High Court tested the disputed instrument on the test of “exclusive possession”.

Maria Radaich appealed to the Court from the finding of the Supreme Court of New South Wales upon a case stated by a magistrate of the Fair Rents Board. The magistrate found that a deed, made between the appellant and the respondents (George William Edward Smith and Ada Smith), constituted a lease and that he therefore had jurisdiction to determine a fair rental for the premises specified therein. Brereton J., exercising the jurisdiction of the Supreme Court over the case stated, held that the deed created no lease but a mere licence therefore the forum to get settle the dispute should be different.

The court noted that the deed contained ten clauses. In form and matter, it resembles an ordinary lease; it contained, inter alia, a covenant that the “licensors” should not unreasonably disallow an assignment of the “licence”. Another clause, cl. 9, confered an option of renewal. The words “lease”, “lessor” and “lessee”, however, were entirely excluded from the document, and the term “licence”, and its appropriate mutations, were sedulously applied to the rights purported to be created.

The court did not consider the caption and form of the document but the court considered the terms of the documents and the actual purpose of creation of the document and concluded that the instrument executed by the parties was a lease and not a licence. The court cited Facchini v. Bryson (1952) 1 TLR 1386 wherein it was held that the parties cannot by the mere words of their contract turn it into something else. Their relationship is determined by the law and not by the label they choose to put on it”

The court ruled that “The true test of a supposed lease is whether exclusive possession is conferred upon the putative lessee.”

At DIXON C.J noted that;

“The preamble recites that the respondents are “to carry on the business of a milk bar” in the subject premises. I think that such a business could only be carried on in reasonable convenience by persons having the exclusive possession of the premises. Nothing in the deed suggests that the parties did not recognise this as an implication of their agreement embodied therein. The premises, it appears, constituted what is often called a “lock-up shop”. On several of the rent receipts given by the respondents, and which are in evidence, is the notation: “All window, door keys, locks, etc., lost or broken, shall be paid for by the tenant”. The agreement contemplates that the so-called “licensee” is to have control of the premises, and of the persons entering them, during business hours and, indeed, at all other times, p.215.”

TAYLOR J at page 217 stated that;

“I have no doubt that the substance and effect of the instrument in question here was to grant to the appellant a right to the exclusive possession of the subject premises upon the specified conditions for the prescribed term. The deed obviously contemplated that the appellant should have the right to occupy the premises for the purposes of her business and the business was always to be carried on upon the premises when they might lawfully be kept open. The character of the business was such that it could only be effectively carried on if the appellant had exclusive occupation and it seems clear that, even at times when they could not lawfully be kept open for the purposes of the business, the premises were to remain under her effective control. That being so it is inevitable that we should hold that the instrument created a leasehold interest and that at the material time the relationship of lessor and lessee existed between the parties.”

In a recently Victorian Case [2018] VSCA 237 the issue before the court was whether the agreement related to the ski fields containing reservations in favour of public affects the grant of exclusive possession.

The majority, FERGUSON CJ and WHELAN JA, was not agree with Niall J and concluded that apart from the reservation in favour of public access, and the related obligation imposed on the lessee, the other reservations in the instruments are not such as would lead to a conclusion that exclusive possession had not been conferred.

The court noted that;

“Absent the public access provisions, a conclusion that the parties intended to

enter into leases, intended to confer exclusive possession, and did so, is overwhelming. Everything about the text of the instruments, their context, and their purpose supports that conclusion, with the single exception of the reservation concerning public access (cl 2.1(k)) and the obligation placed on the lessee concerning public access (cl 5.24).”

The court further noted;

“There are two provisions concerning public access to the demised land. One is cl 2.1(k), whereby the lessor reserves to itself, out of the interest in the land demised to the lessee, a right for the public ‘to enter upon use and enjoy’ the demised land. The other is cl 5.24, which obliges the lessee to allow the public ‘to have access to all parts of the demised land (excluding buildings and improvements)

The court concluded that the public access clauses do not affect the right of exclusive possession because of the nature of the business and the ski lift operators are lessees of Crown land.

Apart from “exclusive possession” there are other elements as well to differentiate a lease from a licence and they will be discussed later.

Disclaimer: This article is a general brief introduction and must not be treated as legal advice.

Originally published on 31 March 2019 at LinkedIn.

Basharat Ahmad Jatt

Barrister & Solicitor

Principal

Jatt Lawyers

Melbourne, Australia

 


Disclaimer

This article is general information for the community and not legal advice. For legal advice please contact with particular facts of your case.

The author is an Australian Lawyer of Pakistani origin. Anyone looking for an Urdu, Punjabi, or Hindi speaking lawyer in Australia can confidently contact Jatt Lawyers.

Legal support for Australian Muslims for inheritance and family law issues in Australia is the common practice area of Jatt Lawyers.

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