Edmonds Judd


Lease vs licence

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.

Buying off the plans

Becoming a more popular option in this tight housing market

It’s no secret that the housing market in New Zealand is incredibly competitive at the moment. Already on a trajectory pre-Covid, demand has shot up since New Zealand came out of lockdown. Many people are choosing to ‘nest’ rather than spend on overseas holidays and thousands of expats are returning home earlier than planned.

Open homes often have queues out the door, many vendors choose to sell at auction where they can expect to make top-dollar and the supply of existing homes for sale is starting to run low.

As a result of this tight market, many people are deciding to buy off the plans. Buying off the plans has become popular with increasing numbers of land developments both in central cities and the suburbs. It has become increasingly popular in Christchurch, for example, where developers are playing a key role in regenerating the city post-earthquakes.

What is ‘buying off the plans’?

Buying off the plans is when you sign an agreement to purchase a property sight unseen, typically from a developer, before construction has been completed or, in some cases, even before the build has begun. If you get in early enough, you may be able to modify the design to suit your taste and style.

Instead of going to an open home and getting the feel for a place when you walk in the door, you are deciding to buy based on your review of the plans and specifications prepared by the developer. While this prospect may be daunting to some (especially the visual learners out there), the result is you will end up with a brand new home constructed in accordance with the latest building standards. If you get in early enough, you may be able to modify the design to suit your taste and style.

How does it work?

With no open homes, no auctions and sometimes no real estate agents, the process of buying off the plans is different to purchasing an existing home. You still sign an Agreement for Sale and Purchase. However, unlike getting a building report to ascertain the condition of the dwelling, you need to consider whether the property will meet your needs by looking very carefully at the plans and specifications as well as considering the property’s location and outlook. The developer may have already completed other similar homes that you can view to get an idea of their style and workmanship.

When you decide to proceed with the purchase, you pay a deposit to the developer. This is usually 5% to 10% of the purchase price. You then may need to wait some time for construction to be completed and a code compliance certificate to be issued before you pay the balance of the purchase price to the developer and move in. This longer timeframe may be attractive to some buyers as the construction period allows more time to save.

Sometimes, the agreement may have a deadline date by which you can withdraw from the purchase and have your deposit refunded if construction has not been completed. This is known as a sunset date.

Why buy off the plans?

Unlike buying an empty section and building your own home where construction prices may increase over time, buying off the plans usually means the purchase price is locked in when you sign the agreement. The upside may be that, depending on the market, the property may have increased in value even before you move in.

You will also have the benefit of owning a brand new home constructed to the latest building standards. This means there should be little to no maintenance or repair work required by you, at least for the first few years. A brand new home will also typically be warmer and drier than an existing one.

Another advantage of buying off the plans is that by purchasing a new home you may be eligible to use the Kāinga Ora First Home Grant of up to $10,000 per person.

What to look out for

There are a few things to look out for when buying off the plans. If you need a roof over your head sooner rather than later, agreeing to buy a property off the plans could be problematic as the timeframes are usually quite long.

As there is no open home to ‘try before you buy’, you should get an understanding of the exact outlook and location of the dwelling — make sure there is sufficient sun, it won’t be overshadowed by a large building next door and so on. You should also note the room dimensions and compare with your existing living or bedroom space to get a feel for how much room you will have once the walls are up.

There might not be flexibility in layout and design so do check that the design of the dwelling is actually what you want.

Seeking out other dwellings completed by the same developer could help you get an idea on the look and feel of your new home.

Getting more technical, it is very important to check the fine print in the agreement and seek legal advice (talk with us!) as to whether the purchase price can be increased by the developer, and what happens if construction takes longer than expected. In addition, we can advise as to whether a sunset date is in place for you to withdraw from the purchase if construction has not been completed by a certain date. It is also important that only you can withdraw from the purchase in these circumstances, not the developer.

You should also ask around about the reputation of the developer and whether they are known for the quality of their buildings, sticking to their proposed timeframes and so on.

Buying off the plans can be a great way for prospective buyers to get on the property ladder and to own a brand new, warm and dry home.

We strongly recommend that if you are considering this way of buying a property, you talk with us early on so we can guide you through the process.

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