Looking to take on corporate premises? Looking to move or change your current arrangement? One of the most important decisions you will make will be to choose between taking on a lease or licence. Read more here about some of the considerations.
What is a lease?
A lease is a contract giving the leaseholder access to a property for a fixed period of time. It primarily differs from a license in that it gives the tenant ‘exclusive possession’ of the property. This means that the leaseholder has private, uninterrupted access to the property for the duration of the lease, provided they do not break the terms in the contract. Generally, leases are often preferred by well-established businesses who are sure of their on-site needs and are likely to stay on the premises for a considerable period of time.
What is a licence?
A licence agreement provides the holder with permission to do something on the Landlord’s property, without being accused of trespassing. The rights granted by a license are personal rather than legal. It is important to note that an agreement may be intended as a licence but if it includes ‘exclusive possession’, a fixed term or reserves of rent, it may actually be a lease. Often licences give the licensee the right to occupy a property, but as exclusive possession is not guaranteed, the licensee may have to share use of the property. Licences are usually shorter documents than leases and are therefore quicker and cheaper to create. This is likely to be especially appealing to businesses which are just starting out.
How do Leases and Licences differ in practise?
The key difference between a lease and a licence is ‘exclusive possession’. Leaseholders can benefit from the security and certainty of knowing that they have full access to the premises for the duration of the contract. Furthermore, businesses will usually have the option to renew their lease when it is due to expire, so a lease is definitely more of a long-term arrangement. As licenses are not exclusive the occupation may be shared and the landlord may access the premises at any time. This can help to avoid the license being challenged as a lease. In addition, licenses are less secure because the landowner may choose to sell the land, which would terminate the license. Licences are therefore more of a short-term plan, which is usually more appealing to new businesses.
Although leases guarantee more control over the property, they do cost more. This is firstly because they are longer documents that are more time-consuming to produce. Secondly, licences do not come with stamp duty land tax whereas this payment may be required for leases, depending on the sale price and lease duration.
Licences entail less commitment to the property than lease agreements as they only grant permission to use the building for the purpose strictly authorised. As licences are generally shorter term (usually about 6 months), they may be considered a more flexible option for businesses Generally with a licence, both parties have the right to terminate the licence early with notice. This could be especially beneficial to new businesses, for example when is difficult to determine business activity and the space required. Although, leases have the potential to be more flexible by including a break clause which enables the Landlord or leaseholder to end the lease early, at the discretion of both parties. This may be an option for businesses who require a greater degree of control over the land than is provided by a license, but who are reluctant to commit to the fixed term of a lease agreement.
There are obviously a lot of points to consider when choosing a contract for your Commercial Property. Hopefully you now understand the key differences between a Lease and Licence, and you may have thought about which agreement would best suit your business? If you require any further information regarding the laws on Commercial Property agreements, please do not hesitate to contact us.