Common contractual arrangements in commercial property

Choosing the premises from which to operate your business can be daunting; it is essential that you know you are entering into the right type of agreement to suit your intentions.

Leases and licences are common contractual arrangements. Although both are similar, there are crucial differences between them which can have significant implications for anyone who owns or occupies commercial premises. Knowing their differences, and when to use each, will help prevent any confusion, conflict or loss that may arise if you are not fully informed.

Possession or occupation?

The essential distinction between a lease and a licence is the type of rights they grant in relation to the property. A lease grants you exclusive possession of the property, but a licence only grants the right to occupy and use the land.

‘Exclusive possession’ in a lease situation means you can exercise control over the property and exclude all others from it, even the owner of the property, except where they have a legal right to enter the premises, for example to complete repairs or inspections. Occupation, however, is a right to use the property for a certain purpose and does not give you the right to exclude other people from it.

A lease typically grants much wider rights than a licence because it gives you control of the property subject to some exceptions. The obligations imposed on you under a lease may be extensive, but provided you are not in breach of the lease, possession of the property will stay with you. Under a licence, however, the opposite is the case. Control and possession of the property stays with the owner except where you are granted certain limited permissions.

This is the main area where difficulties can arise in defining leases and licences because the name of the document may not reflect its true nature. It is not just a case of what language is used, but rather the content of the agreement, and the rights and obligations it creates.

Certainty of term

The length of the arrangement is another important point of difference. Leases are typically long-term arrangements and must be for a fixed period and have certainty around the start and end date. Even a periodic lease has clear terms about how and when it can be ended.

A licence, however, can be for an uncertain period and, depending on the terms of the licence, can be cancelled by either party by giving written notice. The advantage of a lease is that it gives both parties more security because the length of the arrangement is certain, but this in turn means it offers less flexibility than a licence.

Changes of ownership

A lease is a legal interest in land and will survive changes in ownership if the owner sells the property. For example, if a commercial building has a tenant under a lease and is sold, the buyer buys the building with the tenant in place. The tenant can also assign the lease to another party with the owner’s consent through a deed of assignment without the new tenant having to enter a whole new lease.

A licence is different. It is a personal contract between the owner and licensee and generally cannot be transferred to another person. If the owner sells the property, the licence will come to an end.

Both have advantages

The crucial factor that distinguishes a lease from a licence is the scope of the rights, powers and obligations it grants or imposes. A lease generally gives you very wide powers to deal with the land and exclude others from it and anything that falls short of this is generally a licence.

Deciding whether to enter into a lease or licence will therefore depend on your intentions for the space. If you want long-term security and exclusive control over the property a lease will usually be preferable, but it comes with maintenance and other obligations and is generally a longer-term commitment.

A licence may be more suitable for short-term use where more flexibility is required or where the parties are still uncertain about their commitment to the arrangement. A licence is useful, for example, where you have a pop-up shop or use a space that is shared by multiple users.

The important thing is to get good legal advice before you sign on the dotted line so that you can be sure of the rights and obligations you are taking on, and the agreement fits your particular situation.