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Is it a Lease or a Licence? – What does that mean for a landlord with a defaulting occupant?

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By Carolyn Parnell-Webb and Alicia Hill, Principal.

As the reality of the COVID-19 pandemic hits the commercial sector, there has been an increase of businesses challenging the legal arrangements under which they occupy premises. Often their inability to pay rent forms the basis of a dispute. Such a dispute arose in the recent VCAT decision of Sumbul Holdings Pty Ltd v LDZ Pty Ltd (Building and Property) [2020] VCAT 1272 where an occupant butcher who had fallen into arrears, challenged the nature of their occupation with a view of obtaining relief. Having occupied an area of a market precinct under an Occupancy License Agreement for several years, the butcher obtained an interlocutory injunction preventing the landlord from obtaining possession and challenged the nature of their occupancy, claiming that there in fact existed a retail lease.

What happened?

In this case, the head tenant licenced fresh food suppliers to trade in a market style precinct under licence agreements. Following non-payment by the butcher, the landlord served a Notice of Default in June 2020 and a Termination notice in July 2020 in accordance with the terms of the Occupancy Licence Agreement.

The butcher had accrued arrears in excess of $30,000 prior to 29 March 2020. This date proved important because it marked the creation of the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licenses) Regulations 2020 (Vic). As the arrears were accrued prior, the new regulations did not apply.

The butcher was successful in obtaining an interlocutory injunction on 31 July 2020, preventing the landlord from obtaining possession of the premises.

The butcher sought relief from forfeiture pursuant to section 146 of the Property Law Act 1958 (Vic) and claimed that the licence was in fact a retail lease and therefore he was entitled to the equitable remedy of relief from forfeiture and undertook that it would remedy the breach if the relief was granted.

The head tenant maintained that what existed was a licence, not a lease and therefore relief sought was not available as the butcher did not have a proprietary interest.

The landlord argued that the butcher occupied the premises under a licence, and as such, VCAT had no inherent equitable jurisdiction under which it could grant relief from forfeiture.

Issues for determination

The question that needed to be answered was whether the occupancy right was a lease or a licence?

The law

It has been well established that a fundamental characteristic of a lease is the existence of exclusive use and occupation to the exclusion of all others, including the landlord, unless notice of entry is given. If a lessor attends the premises without notice, this is in breach of the tenant’s fundamental right to quiet enjoyment.

In Radaich v Smith (1959) 101 CLR 209, Windeyer J further examined the question stating that, ‘it depends on the nature of the right which parties intend the person (i.e. the tenant or licensee) entering upon the land shall have in relation to the land’. This intention should not be to give the transaction one label rather than another, nor to escape the legal consequences of one relationship by professing that it is another. If a grantee is given a legal right of exclusive possession of the land for a term or from year to year or for life, he is a tenant.

For example, in the case of Street v Mountford [1985] AC 809, a written agreement titled ‘License’ was drawn for Mountford to use two rooms within Street’s house. Street sought to avoid rent control provisions by calling the agreement a license and including a provision which declared that it did not create a tenancy. However, the House of Lords found that there was a tenancy due to the nature of the rights.

In other cases where the nature of occupancy has been examined, it has been considered that a variety of aspects of a transaction warrant consideration to determine what is actually being granted. A right granted may not be in terms of ‘possession’ but something else, such as a right to occupy or carry on business or simply to use. Therefore, determining the answer will be a matter of construction by the court which will consider the nature of rights and the intention of the parties.

The outcome

In this VCAT decision, Member Nash suggested that an alternative way of looking at the issue was to ask whether any ingress by the landlord would result in a claim by the occupier for a breach of the implied covenant of quiet enjoyment which is implied by the law into a lease but not into a licence.

On examination of the terms of the Occupancy License Agreement, the butcher argued that a clause that required the licensee to pay an occupancy fee plus a fee based on turnover was indicative of a lease, rather than a licence. Further, the prohibition on subletting and the nature of the premises being a butcher shop, which was in a separate area of the market, was also a mark of a lease.

Member Nash compared the case to KJRR Pty Ltd v Commissioner of State Revenue [1999] 2 VR 174 (KJRR) and considered the evidence that the occupancy of the butcher was a license and not a lease was stronger than the KJRR, given that the subject agreement granted the butcher the right to use and enjoy the premises but not the right to possess. In KJRR the licensee was given the right to use, enjoy and possess the premises and was subsequently categorised as a lease.

Another factor was the creation of a new occupancy agreement when the butcher purchased the business. Member Nash found that had the butcher occupied the premises under a sub-lease, a new contract would not have been necessary as the original occupancy agreement would have continued in existence with the head tenant as the butcher’s landlord as there would have privity of estate between them

Having examined the nature of the rights granted and the apparent intention of the parties, it was found that the butcher occupied the premises under a licence not a lease. Orders granting possession to the landlord within 21 days were made.

If you have any queries in respect of property related disputes, please do not hesitate to contact Alicia Hill on (03) 8540 0200 or Alicia.hill@mst.com.au