Canada: Lease vs. License – What Is The Difference? Or If It Looks Like A Lease And Reads Like A Lease…

1. Introduction

Commercial property occupancy agreements can take various forms. The term "lease" is commonly used to describe the agreement that governs the relationship between parties whereby one party is entitled to occupy the property of another party for a fee. Similar to leases, license agreements can also govern the contractual relationship between an occupant and a property owner. However, each type of agreement provides for different sets of property rights for both occupants and owners and understanding the distinguishing factors between the two is critical in the commercial leasing context.

This paper will highlight the similarities and differences between leases and licenses by: (i) providing an overview of the elements that make up each agreement, and (ii) through a case law lens, illustrate the main differences in the rights that each agreement allocates to parties and provide recommendations on which type of agreement is suitable for a particular client's needs.

2. The Main Elements of a Lease Agreement

At its core, a lease is both a conveyance of an estate in property and a contractual document.¹ Commercial leases can be used to provide occupation rights to a tenant that is carrying on business activities on a piece of land, or all or part of a building.² There are various categories of commercial leases, such as ground leases, industrial or warehouse leases, office leases, retail leases and renewable energy leases. The Commercial Tenancies Act (the "CTA") governs the landlord-tenant relationship in the commercial context and generally sets out rights and obligations of the parties in terms of the payment and collection of rent, arrears recovery mechanisms, and other important issues.³ It also provides the Ontario Superior Court of Justice with jurisdiction to hear and determine disputes pursuant to the CTA.

Lease agreements may confer various rights to the tenant, including the right of exclusive possession of the property, the right to assign its interest in the lease, and the right to sublet its interest to a subtenant. When a landlord sells a property that is subject to a valid lease, the tenant's interest in the property generally runs with the property, unless otherwise indicated in the agreement.⁴ While landlords do not have actual possession of their property during the term of a lease, the leasehold estate allows the landlord to retain reversionary interest in the property. 5 agreement.4 While landlords do not have actual possession of their property during the term of a lease, the leasehold estate allows the landlord to retain reversionary interest in the property. ⁵

Type of Leases

There are generally five types of leases that may form a landlord-tenant relationship: fixed term lease, lease for life, periodic tenancy, tenancy at will, tenancy at sufferance, and perpetual lease. A common difference between all of the above is the term of each lease. Each type of lease is briefly described below.

i) Fixed term lease

A fixed term lease is for a specified term. To constitute a valid lease, the commencement date of the term must be certain, or at least ascertainable based on a triggering event, and the termination date must also be certain. These leases may have an extension or renewal provision, which may extend or renew the term, however, in order to be enforceable, the maximum length of the lease should be clearly specified. ⁶

ii) Lease for life

A lease for life does not require the length of the agreement to be certain, as such leasehold interest is treated like a life estate, with the difference being that a lease for life requires rent to be payable, whereas a life estate does not.⁷

iii) Periodic tenancy

Periodic tenancies are effective during a recurring period of time, such as a monthly or weekly tenancy. Typically, when a fixed term lease comes to an end and the tenant remains in possession of the leased premises and continues to pay rent that is accepted by the landlord, the fixed term lease automatically turns into a monthly tenancy. Periodic tenancies are lease agreements that continue until they are terminated by notice, which is usually equivalent to the length of the recurring tenancy period. They can also be terminated by an agreement between the parties or pursuant to statute.⁸ For example, Section 28 of the CTA states that at least one week's notice and one month's notice is sufficient to terminate a weekly or monthly tenancy, respectively.⁹

iv) Tenancy at will

A tenancy at will has no set term. By providing notice, either a landlord or a tenant can bring the tenancy to an end, even if the right is stated to be at the sole prerogative of the landlord.¹⁰ The creation of this type of tenancy can be implied after a previous tenancy expires and the tenant remains on the leased premises with the landlord's consent. Similar to periodic tenancies, the terms of the original lease would apply in so far as they are applicable with the new arrangement.¹¹

v) Tenancy at sufferance

This type of tenancy arises when, at the expiry of the lease, a tenant remains on the premises without the consent of the landlord. Once a tenant refuses to vacate the leased premises in response to the landlord's demands, the tenant then becomes a trespasser on the property. Since this tenancy is not consensual, it does not actually produce a tenurial relationship between the parties.¹²

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Footnotes

1. LexisNexis, Commercial Tenancies in Ontario, (LexisNexis:2020) at 1 [LexisNexis].

2. Ibid at 2.

3. R.S.O. 1990, c. L.7.

4. Distinction Between a Lease, Licence and Similar Arrangement, Canada Revenue Agency: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/p-062/distinction-betweenlease-license-similar-arrangements.html.

5. Bruce Ziff, Principles of Property Law, (Thomson Reuters:2018) at 324 [Ziff].

6. Ibid at 325.

7. Ibid.

8. Ibid at 326.

9. Supra note 3 at s. 28.

10 Winslow v. Nugent (1903) 36 N.B.R. 356, 1903 Carswell 53 (S.C. en banc) at 358 N.B.R.

11 Ziff, supra note 5 at 326.

12 Ibid.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.