If you occupy commercial property, it’s fundamental to understand the legal basis of your right to be there. In almost every case, this is under either a lease or a licence. Both are very different in nature, and problems arise if you are unsure of your specific rights and obligations. Beware, the distinction between the two can be blurred with the courts deciding that some agreements stated as licences, are actually leases.
When a landlord wishes to let a property to a tenant on a short-term basis, they have three options; A Lease, Licence to Occupy, Tenancy at Will.
Leases and Licences are similar contractual agreements that involve a landlord granting a tenant permission to occupy land or property for a period of time. However, there are a number of important differences, so parties must carefully consider which option to select
Topics to be answered in this article
What is a lease?
A commercial lease is a contract to transfer property from one party to another for a specified length of time. A commercial lease will set out all the obligations placed on each party.
The advantages of leasing property:
Security of tenure: Provides a tenant with security of tenure under the Landlord and Tenant Act 1954, unless the tenant chooses to contract out of the provisions. Security of tenure gives a commercial tenant the automatic right to renew their lease under similar terms once it comes to an end).
Able to renew lease: The landlord can only refuse to renew the lease under limited circumstances prescribed by the Landlord and Tenant Act 1954 (this ensures that as a tenant, they have peace of mind, knowing that the landlord will not have to find alternative premises once the tenant’s existing lease expires because the landlord decides not to renew the lease or changes the terms to such an extent they are detrimental to the tenant’s business).
Lower upfront costs: Compared to purchasing a commercial property, the upfront costs of entering into a commercial lease are relatively low (this frees up capital that can be invested into the tenant’s business).
Repairs fall to landlord: Depending on the type of lease the tenant enters into and how robustly the tenant negotiates terms, much of the responsibility for the repair and maintenance of the property will fall to the landlord.
Fixed term lease: Leases can be for a fixed term from the outset; be periodic if the tenant is already in occupation without a written agreement; or on expiry, give rise to a tenancy at will. The type of lease will dictate the notice required to terminate it.
What is a licence?
Commercial property licences are ideal if parties require short-term use of a space and ‘exclusive use’ is not necessary (e.g for sharing coworking spaces) during that time. The licensee (rather than a tenant), cannot pass their licence rights onto another person. Licences are also considerably more flexible than commercial leases and the typical notice period for either party to terminate a licence is 28 days.
There are different types of licences which exist in commercial property:
Bare licences: This is the most basic form of licence and is not supported by consideration. It is the giving of personal permission by a landowner to the licensee to enter and remain on the land without payment. Examples of these licences would be allowing a neighbour to store goods on part of the your property, or allowing a delivery driver to cross the your property in order to make a delivery.
Contractual licences: A contractual licence is supported by valuable consideration and is not coupled with the grant of an interest. The licence to enter and remain on land may be the main purpose of the contract (for example, a car parking licence) or may be ancillary to the main purpose (for example, the right to enter a cinema after buying a ticket).
Statutory licences: There may be cases where licences are subject to certain statutes, such as licences to use a route over land protected by the particular utility legislation, for public rights of way or fishing rights.
Licence to occupy: A licence to occupy is a type of licence which grants the licensee the right to occupy a property, but without conferring exclusive possession or a proprietary interest in the land. The nature of this type of licence is similar to a general licence, but it specifically emphasises the right to occupy and in some cases, in common with others.
This type of licence may be used in situations where the parties intend to grant a more limited right of use than a full lease, such as for short-term accommodation or temporary use of a property.
Tenancy at Will: A tenancy at will arises when a party occupies a property, with landlord consent, indefinitely, on the basis that either party can end the arrangement by giving immediate notice at any time. It can be both informal and in writing.
What is the difference between a lease or a licence?
If a contract states that the tenant can refuse the landlord entry to the property, the agreement is almost certainly a lease. However, as case law shows, the line between whether a business tenant has a commercial lease or a licence can be blurry.
Even if the parties call a document a licence and intend it to be such, there is a real risk that what has been created is, in fact, a lease, if the following criteria are met:
- Exclusive possession
- Proprietary interest
- Licence fee/base rent
- Fixed term
Exclusive possession
Exclusivity of occupation is one of the determining key factors in deciding whether a party has a lease or licence. Exclusive possession can be inferred from the terms of the agreement, even if the lease does not explicitly grant it.
Proprietary interest
A lease creates a property right in land, capable of being registered at HM Land Registry which can be sold, assigned, or inherited, while a licence is a personal right which cannot be transferred.
Rent of consideration
The payment of rent or other consideration is a key indicator of a lease in exchange for the right to use the property, while the absence of rent may suggest a licence.
Fixed term
Leases are less flexible in nature and typically have a fixed term, while licences can be granted for a specific period or indefinitely.
If a contract states that the tenant can refuse the landlord entry to the property, the agreement is almost certainly a lease. However, as case law shows, the line between whether a business tenant has a commercial lease or a licence can be blurry.
Even if the parties call a document a licence and intend it to be such, there is a real risk that what has been created is, in fact, a lease, if the following criteria are met:
- Exclusive possession
- Proprietary interest
- Licence fee/base rent
- Fixed term
Exclusive possession
Exclusivity of occupation is one of the determining key factors in deciding whether a party has a lease or licence. Exclusive possession can be inferred from the terms of the agreement, even if the lease does not explicitly grant it.
Proprietary interest
A lease creates a property right in land, capable of being registered at HM Land Registry which can be sold, assigned, or inherited, while a licence is a personal right which cannot be transferred.
Rent of consideration
The payment of rent or other consideration is a key indicator of a lease in exchange for the right to use the property, while the absence of rent may suggest a licence.
Fixed term
Leases are less flexible in nature and typically have a fixed term, while licences can be granted for a specific period or indefinitely.
Exploring a lease or licence for your property?
In practice, disputes often arise over whether an occupier is a tenant or a licensee. The distinction is important. Depending on the circumstances, leases may benefit from a range of statutory protections with leases of commercial premises potentially benefiting from security of tenure and rights to compensation under the Landlord and Tenant Act 1954.
In determining whether or not an agreement amounts to a lease or a licence, the court must consider the effect of the agreement; if it satisfies all the requirements of a tenancy then it will be a tenancy even if the parties have labelled it as a licence. The court may also look at the circumstances in which the agreement was made, including the reason why the occupier was allowed into occupation.
An occupier may wish to argue that an agreement described as a ‘licence’ is a sham. To succeed in this, the occupier will need to prove that both parties intended that it would be a sham. Therefore, even if the occupier can show that they intended to have a tenancy, for a sham it must be shown that the owner also shared that intention. In many cases, however, the owner will not intend to create anything more than a licence.
How can Goughs help?
Our commercial property team can provide assistance at any point as you see fit, whether this be checking a lease or a licence, through to negotiating and completing them. If you would like some help with your lease or licence, please make please get in touch.
