For many commercial property owners, an important arrangement to consider is whether an occupier should be granted a lease or a licence.
Although these documents may seem similar, the legal consequences are significantly different and getting it wrong can put landlords at risk of dispute or loss of control over their property.
Our Commercial Real Estate Solicitor, Lorena Gomez Sutherland, explains the distinction and how commercial property owners can protect their long-term interests.
What is a lease?
A lease is a legally binding agreement that grants a person or entity exclusive possession of a property for a fixed or clearly defined period of time and for a set rent.
It includes obligations on both the landlord and the tenant and, in some cases, will be registrable at the Land Registry.
In simple terms, a lease allows a tenant to use and possess the land or building and control the space demised by the lease (subject to any reservations).
A tenant will often benefit from the same rights that the landlord benefits from under its title, for example, a right to connect to utilities conduits under adjoining property or a right of way over an estate road.
A tenant can exclude its landlord and third parties from the land, except where the landlord has reserved rights of entry to the property, for example, to carry out repairs or valuations.
As the lease creates a proprietary interest in the land, a tenant may have the right to assign the lease or sublet the property. Assigning the lease transfers the tenant’s right of exclusive possession to a new tenant.
Whereas an underlease, or sublease, creates another layer in which the tenant is still accountable to the landlord, but the subtenant is accountable to the tenant.
In this situation, it is important to the landlord that the subtenant’s right of occupation cannot outlast the tenant’s right and, therefore, a sublease would usually be excluded from security of tenure.
Security of tenure arises under the Landlord and Tenant Act 1954. This provision automatically grants a tenant (of a commercial lease of 6 months or longer) a statutory right to renew the lease at the end of the term, unless this security is formally excluded.
For many commercial landlords, a lease is preferable to a licence because it is more structured and regulated, as well as offering a defined length of term or an agreed break option.
Leases often include repairing obligations on tenants, as well as upward-only rent review provisions, which help to maintain the investment value of the property for a commercial landlord.
Furthermore, a landlord selling its reversionary interest will be able to provide clarity to a buyer as to occupational interests in the property.
What is a licence?
A licence, on the other hand, is simply a personal right or permission given to a person or entity to do something on the landowner’s property.
It may be expressly granted or implied and might be used to allow use of sports pitches on certain evenings of the week, to set out bistro tables outside a café or to allow a licensee to cross a field for a defined purpose.
A licence is not always documented by contract and a bare licence is formed when informal permission is granted from a landowner to a licensee, even if no consideration or payment is received.
Since a licence is a permission, not a proprietary right, it does not grant exclusive possession and cannot be assigned to another.
It does not afford the licensee security of tenure and is usually easily terminated on notice – provided that a lease has not inadvertently been granted.
A licence can be appealing when considering short-term occupation, for example, over Christmas where festive stores are seeking temporary trading spaces. It can also allow either party to terminate on relatively short notice.
Commercial landlords may use licence arrangements to allow early occupation to a tenant ahead of a lease being granted, perhaps because the tenant is fitting out the premises before it formally takes occupation under its lease.
It is important to document this carefully to ensure that a relationship of landlord and tenant does not arise.
Why does the difference matter?
Wrongly classifying a licence as a lease is one of the most common and costly mistakes made by commercial property owners.
If a document is labelled a licence, but the terms actually grant exclusive possession of the property, for a fixed term and with a rent reserved, then the licence may instead be a lease.
If a licence is, in substance, a lease, an occupier may gain:
- rights to remain in the property
- statutory protections
- an ability to challenge notices or termination
- a strong negotiating position in any dispute
- rights to assign or underlet.
As a commercial property owner it is, therefore, imperative to make sure any arrangements you put in place for any occupier protect your interests.
How can property owners protect themselves?
To avoid any future confusion or disputes, commercial property owners should ensure their agreement reflects the intended arrangement and clearly states any rules around possession and access.
Our specialist Commercial Property team can help you structure your occupation agreements correctly and ensure statutory protections are properly excluded where necessary.
We can help to protect your interest in your property and identify any risks before they lead to disputes.
If you are already concerned about an existing occupation arrangement, we can provide expert advice on your next steps.
If you need help drafting or reviewing your lease or licence, reach out to our team for guidance.
