How is a licence different from a lease on commercial property?

Those taking occupation of a commercial property will usually hold it under either a lease or a licence – and many businesspeople will not worry too much about the distinction between each one as long as they get to use the property.

However, there are crucial differences between the two and care should be taken to ensure the occupation of a premises gives the rights appropriate to the needs of both parties.

Lease vs licence commercial property

A lease and a licence are both kinds of a contractual agreement between the owner (lessor or licensor) and the user (lessee or licensee). The contract arrangement both parties to the terms of the agreement. A lease is an agreement whereby a tenant will occupy a property exclusively, for a fixed period of time, whereas a licence grants permission for the licensee to do certain agreed activities on a licensor’s property.

What is a commercial property licence?

A commercial property licence is a lawful grant of a permission to do something that would otherwise not be legal or allowed, for example, to occupy a property. The licence basically stops the permitted act from being a trespass and offers little security to the licensee. A lease can give security of tenure to a business tenant, however, a licence doesn’t.

Like a lease, a licence can attract a monthly rent and be for a fixed term, but it only allows the licensee to use the property for a specific purpose for a defined, usually short, duration. A lease tends to be for fixed, longer periods of time giving exclusive occupation to a tenant.

What is a commercial property lease?

Commercial leases, unlike a licence, usually create or grant a legal interest in the land for the tenant.  A lease can also be bought and sold.  Any sale of the property during the term of the tenant’s lease would be subject to the tenant’s lease.

The difference between a commercial property lease and a licence in property law

Crucially, a licence agreement does not give the licensee the right to have exclusive possession of the property. Following the House of Lords ruling in Street v Mountford (1985), a tenant with exclusive possession of a property is entitled to exercise the rights of the landowner and exclude people from the land (apart from any rights the landlord may have under the lease to enter the land to carry out repair works, for example).

When a lease is created, whether for a residential or commercial property, there are a number of obligations imposed on both parties by the Landlord and Tenant Act 1954, including strict procedures involved in evicting a tenant: a tenant’s occupation cannot be brought to an end, even following expiry of the lease term, unless the landlord can satisfactorily prove one or more of certain limited statutory grounds for repossession.

Even when a statutory ground is made out, the owner/landlord can in some circumstances be forced to pay financial compensation to the protected occupier/tenant when the lease finally does come to an end.

On the other hand, a licence creates few rights and obligations and in general can be revoked through giving notice of revocation to the licensee allowing them a reasonable time to leave the property.

When a licence becomes a lease

If a document is labelled a licence but grants the licensee exclusive possession, it is likely the courts will interpret the document to be a lease and the benefits of the simplicity of a licence will be lost. Careful consideration must therefore be given when issuing or obtaining a licence to what rights are intended to be granted and those actually granted so that possessory rights are not given by accident and you are left with a lease in disguise.

For further information on licences and leases in commercial property, please call 01732 770660 or email [email protected]. Warners Solicitors has offices in Sevenoaks and Tonbridge, Kent.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.

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