Commercial lease or licence?

Commercial lease or licence?

As a commercial landlord, there may be times when it suits you to grant something that feels less formal than a lease, like a licence to occupy.  In other situations, you will want to be sure that you have a binding lease and that you know exactly when it will end.  It can be more difficult than you might expect to know for sure whether you have granted a lease or a licence, and you could find yourself stuck with a business tenant when you want your property back.  It really pays to get your solicitor involved, even if you think you are just letting someone use your property for a short time, to make sure you have all the protection and certainty you need.

‘It can be tempting to enter into a swift back-of-an-envelope arrangement with someone you trust, who has a good idea for a new business and is willing to pay for occupation,’ says Kimat Singh, head of the commercial team with Kerseys Solicitors. ‘Sadly, landlords often pay a price for that informal approach and wish they had been better advised.’

Kimat explains why.

Why grant a licence instead of a lease?

The main appeal of a licence is that it is usually quicker and cheaper to draft and agree than a more formal lease.  It does not need to be executed as a deed, so you do not need to find a witness for your signature.  A licence gives your occupier a personal right to use the property, but does not grant them a formal interest in the land in the way a lease would.  This means it can be more flexible and there is no need for the occupier to incur time and money on a Land Registry application.

If you want to allow someone to use your property for a short period and to let them in quickly, a licence can be very useful.  Used carefully, a licence will be outside the statutory security of tenure that business tenants get under the Landlord and Tenant Act 1954, as long as you do not allow your occupier to stay for longer than 12 months.

How to tell the difference

The most important thing to remember is that it does not matter how you label the arrangement and what you write in the documents.  If there is a dispute between you and your occupier and it ends up in litigation, the court will look at the practical circumstances of the arrangement.

For many years, the main test has been whether the occupier has exclusive possession, in other words whether they can exclude everyone else, including you, from the property.  If they do, it is likely to be a lease; not a licence.

The Court of Appeal recently applied a new test, which is whether the term of the arrangement is sufficiently certain.  The court was asked to examine a lease allowing a telecoms operator to occupy land.  It was drafted as a lease, with an initial term of 10 years but which would then continue until determined on 12 months’ notice.  This degree of flexibility clearly suited the parties, but the court said this meant that the term was not certain, so the arrangement must be a licence not a lease, despite the fact that the telecoms operator had exclusive possession.

Why it matters

Unless you are clear that the occupation is a short-term arrangement, there are several reasons why you would be better granting a lease.

• If you want to make sure you can get your property back at the end of the term, you will want to contract out of security of tenure and this procedure is available only for leases.
• If you view your property as an investment and may want to sell it with the benefit of the rental income, there must be a lease. Because a licence is personal to both you and your occupier, it would end on the sale, so the buyer would have to make a new arrangement with the occupier.
• Similarly, if your occupier wants to be able to assign their right to occupy, they need a lease rather than a licence.
• If you have finance secured on the property, your lender will probably have specified that there must be a lease in place with a predictable rental stream.

How to avoid problems

Make sure you and your occupier are clear about whether you are intending to grant a lease or a licence.  Think about whether the occupier has exclusive possession.  If, for example, you are granting a licence to place a coffee kiosk on part of your site, your solicitor can include wording giving you the right to change the precise location of the kiosk, which should help avoid an argument that the occupier has exclusive possession.

Make the period of the arrangement certain.  This may be more difficult where you are granting rights for, say, telecoms equipment or other infrastructure where utility providers want something more flexible than a fixed term lease.  One way round this would be to grant a longer fixed term lease, but allow the tenant the right to break at agreed intervals.  Your solicitor will make sure that any break rights are clear and properly drafted.

How we can help

It is vital to stay in control of your investment property and be clear about who is occupying and on what basis.  Our commercial property experts can guide you through the process and make sure you and your occupiers get what you were expecting.

For further information, please contact a member of our commercial team at:-

Kerseys Solicitors in Ipswich at [email protected] on 01473 213311 or
Kerseys Solicitors in Felixstowe at [email protected] on 01394 834557 or
Kerseys Solicitors in Woodbridge at [email protected] on 01394 813732 or
Kerseys Solicitors in Colchester at [email protected] on 01206 584584 or
Kerseys Solicitors in Stowmarket at [email protected] on 01449 613631 or

visit our web site and click “Call Me Back” where one of our commercial property solicitors will be happy to contact you at a time that is convenient to you.