Leases v Licences – The penalty for poor drafting is litigation

In this article, Scott Ritchie, Partner in our Property and Infrastructure Team, examines a recent property court case in which a Scottish judge remarked that "the penalty for poor drafting is litigation" to demonstrate the key differences between a "lease" and a "licence" and why this matters. 

20 June 2023

"The penalty for poor drafting is litigation" is a remark made by a Scottish judge in a recent property related dispute.

As slogans go, it's not bad. It's maybe not as catchy as Nike's "Just Do It" but it's a good one for real estate lawyers.

The court case in question (Sheriff v O'Rourke – 13 April 2023 – Sheriff Appeal Court) involved a disagreement as to the nature of a contract for the use of a residential property. Was it only a "licence to occupy" or was it a "lease"? 

The contract was poorly drafted. From the judgement, its intended purpose appeared to be to allow a couple the right to occupy a house (before buying it) for the purposes of carrying out minor alterations and redecoration. 

However, the contract contained various conflicting provisions and it was described as containing several obvious and careless errors. 

As a result, the parties ended up in court (twice). 

From a legal perspective, the case focused on the important differences in Scots law between a “lease” and a “licence”.

What is the difference? 

There are a few key takeaways from the decision:

  • There is a difference in Scots law between a "lease" and a "licence to occupy";
  • A “licence to occupy” is a contract for enjoyment of some aspect of property but which falls short of conferring the full right of a lease. It is defined by reference to what it is not (i.e. "not being a lease");
  • In contrast, a lease is a contract for possession of property that contains certain "cardinal elements", namely:
    • parties” (i.e. landlord and tenant);
    • leased "premises";
    • an agreed "rental";
    • a “duration”; and
    • (probably) exclusive “possession”.

Why does this matter? 

In Scots law, a tenant under a lease can benefit from a number of legal rights that are not held by a mere "licensee". 

These rights can include security of tenure (for example, where the lease is a "private residential tenancy"). 

It is also more difficult to terminate a lease than a licence (for example, commercial tenants of business premises benefit from certain statutory protections against premature termination). 

The principle of "tacit relocation" (i.e. automatic continuation) also applies only to leases, and not to licences. 

Be careful when signing a real estate contract!

The Sheriff v O'Rourke case demonstrates that there may be circumstances where you may think you are signing a "licence to occupy", but in law, you are actually signing a “lease”. 

Equally, you might think you are signing a “lease”, but in law, it is a “licence to occupy”. 

The court will look at the substance of a contract, and the fact that a contract is labelled as a "lease" or a "licence" will not conclusively determine its legal status.

The case also demonstrates the need for real estate contracts to be clear in their purpose and drafting, to avoid the "penalty of litigation".

If you need legal support in connection with real estate contracts, please do not hesitate to contact Shepherd and Wedderburn's top ranked real estate team.