Lease and licence – why property owners need to know the difference

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Lease and licence – why property owners need to know the difference

Every landlord in the UK and every company or person occupying a commercial property needs to know the fundamentals of leases and licenses. After all, for tenants, this means their right to be on the property. In almost every case, the right to occupy property for tenants is pursuant to a written document, which is either a license or a lease. However, these bring different obligations and rights, so making the distinction is crucial. Often times the lines are blurred and there are cases where a court can hold a certain agreement as a lease, despite the fact it was stated to be a license. And landlords especially have to be mindful of unintentionally creating a lease. Let’s delve deeper into the subject of leases and licences.

What makes a lease?

Commercial leases fall in the category of legally binding contracts. The two sides of the agreement are the landlord and a business tenant. As per the lease, the tenant has a right to use the property for whatever their commercial activity is. The lease in this case is valid for a specified period of time. The tenant pays a rent to the landlord during this period of time. The lease outlines all of the responsibilities and rights of both parties of the agreement. In the most typical cases, the landlord has the right of entry onto the property and the tenant has the right to exclusive possession during the period of the lease.

All about a license

Licences represent contractual permissions for property occupation, but they are personal. They don’t confer property rights and there is no way to buy them or sell them. There is no security of tenure, making the licensee entirely subject to the wish of the licensor. Once the licensor has decided that they have no more interest in the property, the licensee’s right of occupation is terminated. All of that outlines some clear disadvantages for the occupier. However, there are some cases where a license is the better option than a lease. The main point is that a licence is granted cheaply and much more quickly than a lease. If the occupier is only interested in the property short-term, then they may be after a licence. One typical example of this is a retailer, who would only like to set up a temporary shop for the Christmas holidays. If there is an owner of vacant retail premises who is struggling to find a long-term tenant, they will be more than happy to grant a temporary licence. It is an agreement that serves the interests of both parties well.

What every property owner out there needs to consider?

Property owners should exercise extreme caution in every case where they wish to grant licence and be careful not to grant a lease. If that were to happen, the occupier will benefit from statutory protection as outlined in the Landlord and Tenant act 1954. The label of the document is never important, in regards to what amounts to a lease or a licence. Rather, the document as a whole is what matters most. Sometimes property owners will make sure they never use the terms tenant, landlord or rent, or maybe they will declare the right to occupy is personal to the property owner. A court may find that the occupier has exclusive possession and consider no reason for the agreement to be anything but a tenancy, even if it states it is a licence and not a lease. One typical example of this is the case of London College of Business Limited v Tareem Limited.

© Occupa Commercial Property Consultants

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