Lease or Licence?

It is common in developments where the developer does not own the land that a developer will enter into a development agreement with the land owner coupled with a construction lease or licence to occupy and construct on the land.

The ability to occupy the land is crucial to undertaking the development and if the developer is constructing significant improvements on the land then the developer will need to fence and restrict access to the land so that it can comply with relevant laws and regulations relating to a construction site.

A construction lease was the centre of a dispute in a case before the Civil and Administrative Tribunal of New South Wales – Australia Avenue Developments Pty Ltd as trustee for the SOP Site 3 Partner Trust v Chief Commissioner of State Revenue.

In this case land tax would be payable by Australia Avenue Developments Pty Ltd (AAD) if it was held that AAD occupied the land pursuant to a lease rather than a licence. The Tribunal found for the Chief Commissioner of State Revenue and concluded that AAD occupied the land pursuant to a lease.

When reviewing the “reasons for decision” it would appear that the Tribunal’s decision was made easy because the parties had entered into a document entitled “Construction Lease”.  However the Tribunal rightly acknowledged that in assessing whether a document grants a lease or a licence is a question of substance and not just one of language.

Is a lease or licence created when an owner gives a developer possession of the land? The answer will depend on the circumstances.  A lease is likely to have been created if exclusive occupation of the land has been granted. However if the intention of the parties as recorded in the document was only to give the developer a personal privilege to use the land (even though the document purports to give exclusive possession) then it may be the case that only a licence to use the land exists.

In many cases a licence is going to be the appropriate form of access for development arrangements. However, parties need to carefully consider whether it is appropriate for them to give or take control of land for a development pursuant to a lease or a licence. They then must ensure the documentation reflects their intention.

Authored by:
Tony Greenaway, Partner
Travis Coldrey, Special Counsel