Frettens’ commercial property solicitor Richard Ramshaw outlines the difference between a commercial lease and licence.
What is a commercial lease?
A commercial lease is a contract used to transfer property from one party to another for a specified length of time.
A commercial lease will set out all the obligations placed on each party.
What is a commercial licence?
A commercial licence is usually used when property access is required for a short period of time.
For example, to ‘fit-out’ the property before the lease starts.
In what ways are commercial leases and licences similar?
They both grant permission to use the whole or part of a commercial property.
What are the differences between commercial lease and licence?
There are many differences between commercial leases and licences. I outline below some of these differences to clear up any confusion.
- Licences do not provide the same security that a lease would because either party can terminate a licence on 1 weeks’ notice.
- Leases grant exclusive possession of the property whereas a landlord can enter the property at anytime under a licence.
- Licences are used for a specific purpose, such as to carry out alterations to a property.
- Licences do not grant any other rights to use the property and the person with the benefit of it will not own the property in any way, they are simply given permission to use it.
- Leases create a legal interest, whereas licences do not.
- Leases can be assignable, whereas licences are personal to one individual and cannot be transferred.
Which is better lease or licence?
This really does depend on your circumstances and what it is you would like to achieve.
Below I outline some scenarios when a lease or a licence may be more advantageous…
What advantages does a commercial lease have for tenants?
When a tenant requires exclusive possession of a property for a long period of time, a lease will be more beneficial to them than a licence.
For example, when the tenant wants to run a business from the property for a considerable number of years.
How does a commercial lease benefit the landlord?
A landlord may prefer to use a lease, even if the tenant’s occupation is only for a short time because:
- The landlord will receive consistent rental payments
- The tenant can’t just up and leave, and
- The landlord won’t suddenly be left with an empty unit and be liable for paying business rates
What advantages does a commercial licence have for landlords?
Licences are more flexible for landlords because they can be terminated within 1 week.
Licences can be also used as a quick fix for landlords when sudden short-term access is required.
What are the risks for tenants?
From a tenant perspective, a licence is a risk as it does not provide any statutory security for tenants.
So, which is better lease or licence?
From a landlord’s perspective, both have their advantages.
However, for tenants a lease will probably be preferred due to the lack of security that comes with a licence.
What if it isn’t clear whether my document is a lease or licence?
Generally, when there is doubt over what the document is, the courts tend to view documents as leases even if it is called a licence.
This could have a massive impact on the landlord’s property because they could end up in a situation where the tenant has a right to remain in the property at the end of the term.
What is a tenancy at will?
These arise when landlords let tenants stay in the property before the grant of a new lease for an indefinite period of time.
Are there any risks to a tenancy at will?
Yes, for both landlords and tenants as either party can terminate the tenancy at any time.
A tenancy at will is a particular risk for tenants, as they do not have any rights over the property.
There are advantages and disadvantages to using leases and licences and there are certain circumstances where one would be more beneficial to use than the other.
It is therefore vital to know when each should be used and why. If you are unsure or want to find out more, please contact a member of our commercial property team.