Lease or licence?
When letting a third party occupy a commercial premises, landlords often believe that a lease is the only way to achieve this. However, depending on the terms agreed with the proposed tenant, a lease may not always be the best option.
In particular, when the parties need flexibility over the term of the agreement, a licence can sometimes be a sensible alternative.
So what are the differences between a lease and a licence?
A lease is an exclusive form of letting. Under a lease, a tenant is granted exclusive occupation of the premises or the relevant part of it for a fixed amount of time. This means that, for the term of the lease, a tenant has the ability to exclude other parties from the premises and exercise proprietary rights.
A commercial lease is also subject to the provisions of the Landlord and Tenant Act 1954 which automatically imply into a lease (unless a particular legal process is followed) that the tenant has ‘security of tenure’ (i.e. the right to remain in the premises at the end of the fixed term).
Accordingly, leases tend to be more useful when both parties are agreeing to enter into a longer term relationship.
A licence is simply a permission to use another’s property. It essentially amounts to an exemption from trespass and, as a result, the tenant is not granted exclusive occupation of the premises but rather occupies it as licensee.
A licence is not necessarily subject to the same laws that affect leases meaning the parties can agree their own provisions. The term of a licence is often agreed but it is generally coupled with the ability of either party to terminate on notice.
Licences are therefore quite helpful, for example when a starter-business wishes to occupy a premises, but does not wish to commit itself to a fixed, long term occupation. Licences are also useful for landlords when they would prefer not to afford a tenant the exclusive rights that come with a lease and be able to evict the tenant more easily on notice.
Which type of letting is best depends very much on the parties and the circumstances.
Great care, though, must be taken in drafting the agreement. A licence can effectively create a lease if incorrect or unclear wording is used.
Sam Read is a solicitor in the Property Team at Barker Gotelee, Suffolk solicitors.