Commercial Property: Lease vs Licence
5 October 2021 by Joe Metcalfe
Whether you own premises and need to grant to somebody, a right to occupy, or if you are hoping to take occupation of business premises, it will be important to understand exactly your rights and obligations under a premises agreement for occupation. There are fundamentally, two types of occupation of commercial premises – a lease or a licence and it is necessary to understand the elements of each type of agreement before you commit to one or the other.
What is a Lease?
A lease is an agreement between a landlord and tenant, where the landlord grants exclusive possession of business or commercial premises to the tenant, for a determinable period of time. A lease is both a contractual relationship and an estate in land, which means that a lease will continue even if the landowner sells the premises to someone else.
One of the most important elements in determining whether an agreement to occupy is actually a lease, is exclusive possession. A tenant has exclusive possession if they have the right to exclude both the landlord and third parties from the premises, other than situations specified within the lease as a right for the landlord, which can include the carrying out of works or the commissioning of an EPC, for example.
What is a Licence?
A licence is an agreement between a licensor and licensee, whereby the licensor simply grants a personal, contractual permission to the licensee, which allows them to do something on the licensor’s property. Examples include a licence to occupy part of an office and a licence for storage. A licence does not grant exclusive possession of premises.
It is worth noting that a licence offers very little security. The reason for this is that a licence does not create an estate in land, which means that if the landowner sells the premises, the licence will come to an end. On the other hand, licences allow for greater flexibility as they tend to be entered into for shorter periods of time, and they can be completed more quickly.
Why is this Important?
Issues can arise where parties enter into an agreement that purports to create a lease or a licence, without seeking legal advice. If the parties have entered into a licence, which in fact contains the elements of a lease, the court will look beyond the title of the document and will focus on the substance and the form of the agreement to decide whether a lease or a licence exists.
The drafting of a lease and a licence is of particular importance when it comes to security of tenure. A lease needs to appropriately exclude or include security of tenure. A licence, because it does not allow the occupant exclusive possession of the premises, will always be excluded from security of tenure.
If you are a business owner, tenant or landlord and require some help in leasing a commercial property, please do get in touch with our commercial property team on 01206 835316 or email [email protected].
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