There are different options available when it comes to commercial property ownership and usage. Two of the options available for those looking to occupy commercial premises are 1) a commercial lease (lease) or 2) a licence to occupy (licence). Both a lease and licence are legally-binding agreements between the owner of the commercial property (the lessor or licensor) and occupier (tenant or licensee) enabling them to occupy the property for a period of time. Both agreements also require payment by the occupier, e.g. of rent or licence fee, however there are crucial differences.
Rights as Occupier:
A lease is an agreement whereby a tenant will occupy a property exclusively, for a fixed period of time, whereas a licence serves as personal permission for the licensee to do certain agreed activities on a licensor’s property which would otherwise have been illegal/prohibited for them to do, e.g. occupy. The licence stops the occupation from being a trespass.
A lease tends to be for fixed, longer periods of time granting the tenant ‘exclusive possession.’ This gives tenants the right to possession of the property, to the exclusion of all others including the landlord during the fixed term (though the landlord may have rights under the lease to enter the land to carry out repair works, for example). Licensees on the other hand are not given the right to exclusive possession of the property and so landlords may enter the property, usually upon reasonable notice.
Under a lease, a tenant is entitled to exercise the rights of the landowner and therefore usually has more freedom in terms of their enjoyment of the land and any alterations they may wish to make compared to a licensee. Though entitled to exercise the rights of the landowner, leases often contain covenants which tenants must comply with and which may contain restrictions on matters such as decorations, alterations etc. They often also contain covenants which the landlord must comply with.
If a landlord wishes to grant a licence, it must be careful when drafting the agreement to ensure it does not inadvertently create a lease. The fact that landlord and tenant both intended to create a licence and have labelled the agreement a ‘licence’ is of little importance. If required to determine whether an agreement amounts to a licence or a lease, the court will consider the document as a whole, together with the facts of the case. If the courts determine that in reality the occupier has been granted exclusive possession of a property, even if accidentally, then the agreement is likely to be construed as a lease. This will mean that the occupier will be able to exercise the rights of the landowner and may also benefit from a degree of statutory protection under the Landlord and Tenant Act 1954 (as noted below), which the Landlord may not want.
Leases unlike licences, also grant a legal interest in the land for the tenant. Any sale of the property during the term of the tenant’s lease would be subject to the lease. Just like a freehold, a lease can also be bought and sold. Leases can also be transferred by the landlord or tenant to another party. Licences on the other hand are personal and do not create any property rights/legal interests in the land and cannot be assigned to another party.
Security:
The Landlord and Tenant Act 1954 imposes strict procedures applicable to leases including relating to the eviction of a tenant. Provided operation of this Act has not been excluded from the lease, the tenant is afforded protection and will be able to continue their lease even after its expiry at an open market rent unless the landlord can satisfactorily prove one or more limited statutory grounds for repossession. Even when a statutory ground is made out, the landlord can in some circumstances be forced to pay financial compensation to the tenant when the lease finally does come to an end. The tenant has security of tenure, unlike a licensee.
A licence grants the occupier (licensee) very few protections. The licensee occupies entirely at the pleasure of the licensor. Their agreement can be revoked anytime the licensor wishes. If the licensor disposes of their interest in the property, the licensee’s right of occupation ceases immediately too.
Flexibility, Simplicity & Cost:
For some owners and potential occupiers, a licence is an attractive option for them, given its high degree of flexibility and simplicity compared to a lease.
As noted above, leases are generally a more long-term option which ties a tenant into a fixed rent, for a fixed period of time. A licence on the other hand provides both parties with the right and flexibility to terminate their agreement and bring it to an end if they wish, upon reasonable notice. They contain less onerous conditions.
A licence can also be granted more quickly and cheaply than a lease and so would be a more attractive option to those seeking a very short-term occupation of premises. For example, an owner of vacant retail premises who is struggling to find a long-term tenant, may wish to grant a temporary licence to a business owner looking to just trade perhaps over the busy Christmas period. A licence in this circumstance would suit both parties’ short-term interests in comparison to a lease.
If you are looking to enter into a commercial lease or licence or you are an owner of commercial property looking for some assistance with the above, contact a member of our commercial property team today on 0845 287 0939 or get in touch by email for comprehensive and up-to-date legal advice.
