Lease vs. Licence – what is best?

Buying and Selling a Business

Commercial landlords looking to rent out their property can do so in a number of ways. Deciding the best means of renting out your property will depend on the circumstances and requirements for each letting. For example, a landlord may wish to let a property to a tenant on a short-term basis only, without wishing to create any long-lasting obligations or arrangements.

Below, we discuss the most common types of arrangements we assist with when instructed by clients.

Leases and Licenses – the similarities.

Before we discuss the differences between each type of letting arrangement, it will be useful to first assess the similarities between a Lease and a Licence.

Both are contractual agreements between a landlord and tenant and both create legal obligations for the duration of the term agreed. However, under a Licence, the landlord is referred to as the “Licensor” and the tenant as the “Licensee”.

Both Leases and Licences grant occupational rights to use the property for a specific purpose and period. And at the end of the term, both agreements will terminate.

Leases

A Lease is a type of contractual agreement between a landlord and tenant, where, in exchange for the landlord granting the tenant a right to occupy the property, the tenant (or “lessee”) is often obliged to pay the landlord (the “lessor”) a rent.

A Lease is granted to the tenant for the purposes of “exclusive occupation” and for a fixed term. The tenant therefore has the right to occupy the property on an exclusive basis and has the ability to exclude all others from the land, including the landlord. In essence, the tenant has control over the property.

A Lease also creates a legal estate in land, which means the tenant obtains a legal interest in the property (a leasehold interest) which last for the duration of the Lease term. This does not mean the tenant owns the land upon which it occupies; it merely owns a set of rights, obligations and interests which are set out in the Lease itself.

Leases can also be transferred (or assigned) to third parties and, in some cases, are capable of being registered at HM Land Registry with its own title number.

Leases are generally protected under statute unless an agreement is made between the landlord and tenant (before the Lease is completed) to exclude it from benefit of protection. Otherwise, the tenant will be entitled to security of tenure, that is, a right to stay on at the property or request a renewal of their Lease at the end of the term, subject to certain exceptions.

When should a Lease be granted?

A Lease to a tenant will often be suitable in the following circumstances:

This list is not exhaustive and there may be a number of other reasons why granting a Lease may be a more suitable arrangement, depending on the facts of each transaction.

Licences

A Licence, on the other hand, does not create any legal estate in land and only permits the Licensee to use the property for a particular purpose. Licences can be on-going or last for a fixed duration, depending on the requirements. Most importantly, a Licence does not grant the Licensee a right to exclusive possession of the land. Namely, the land or property which they occupy may be shared with other Licensees (i.e. shared office spaces or concession stands).

Crucially, if a Licence of land or property is granted and the Licensee obtains exclusive possession of the same, then this may, in fact, constitute a Lease, irrespective of whether it is called a “Licence”. Ultimately, the courts look at the substance of the legal agreement, so if the Licence bears all the hallmarks of a Lease, then a Lease will have inadvertently been granted. This can be a very costly mistake to make so, whilst Licenses are a flexible option, they must be carefully drafted to ensure they hold up legally.

The advantage of a Licence

Licences are generally granted for a term of up to six months, although they can be longer. They are also fairly flexible agreements in that the Licensee can terminate the Licence on giving short notice, and vice versa (typically 28 days’ notice). This is in contrast to a Lease which often runs for a period of years and will contain many restrictions, obligations and impose certain requirements on the tenant which they will need to comply with.

A Lease cannot generally be terminated and the tenants’ obligations will continue for the duration of the term, unless they assign the Lease, or have agreed an option to terminate with the landlord before commencement.

Licences are far simpler arrangements to Leases and often less expensive to draft.

Tenancy-at-will – a third option?

A Tenancy-at-will is a very flexible type of agreement only suitable in very certain circumstances. They are similar to Licences and generally only granted for very short term arrangements. The main feature of a Tenancy-at-will is that they can be terminated at a moment’s notice, usually by either party. Whilst not suitable for long-term business arrangements, they can useful where a tenant needs to gain immediate access to a property (perhaps during the period between exchange and completion) or where the landlord requires a very short term arrangement to keep rental income flowing in, but, at the same time, wishes to maintain a high degree of flexibility if it is considering other options (i.e. development).

Hart Reade Solicitors are a full-service law firm with offices in Eastbourne, Hailsham, Polegate and Meads.  We hold both a Lexcel and Conveyancing Quality Accreditations from the Law Society of England and Wales, as well as being an ALEP member. 

To make an appointment with one of our specialist Commercial Property lawyers please phone our office on 01323 727 321, or alternatively please fill out the contact form below:

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