When it comes to commercial property arrangements, understanding the difference between a lease and a licence to occupy is essential. These two legal concepts may appear similar at first glance, but they offer very different rights, responsibilities, and levels of protection to both landlords and occupiers. In this article, we explore the key features of leases and licences and how they apply to commercial property.
What is a licence to occupy?
A licence to occupy is a personal, contractual permission that allows an occupier (the licensee) to use a property without creating a legal interest in the land. It does not grant exclusive possession, meaning the occupier cannot exclude the landlord or others from the premises.
Examples of a licence to occupy include:
- Use of a shared car parking space
- Hot-desking arrangements in an office
- Short-term, flexible space usage
Licences are typically used for short-term or flexible arrangements and can often be revoked at short notice.
What is a lease?
A commercial lease creates a legal interest in the land and typically offers greater rights and protection to the tenant.
For an agreement to constitute a lease, it must satisfy the following three conditions:
- Exclusive possession: The tenant has the right to exclude all others, including the landlord (except where the lease permits access for emergencies or repairs).
- Fixed or periodic term: The lease must be granted for a certain duration, either for a fixed term or on a rolling basis.
- Rent is usually payable: While not always essential, most commercial leases include a rent obligation.
Example:
A landlord grants a tenant exclusive use of an office suite for five years, with rent payable quarterly; this is a lease.
Lease vs licence: key legal differences
While licences and leases may both involve a fee and a defined period of occupation, the legal consequences are vastly different:
Feature |
License to Occupy |
Lease |
|
Exclusive possession |
No |
Yes |
|
Legal interest in land |
No |
Yes |
|
Transferable (assignable/sublettable) |
Rarely |
Often, subject to lease terms |
|
Security of tenure under the Landlord and Tenant Act 1954 |
No |
Yes (unless excluded) |
|
Revocability |
Can be revoked easily |
Cannot be revoked unilaterally (except by exercise of break option, or forfeiture by landlord) |
Risks for landlords: when a licence becomes a lease
Landlords should be cautious when structuring occupational arrangements. Labelling an agreement as a "licence" does not make it so in law. If the arrangement includes:
- Exclusive possession;
- A fixed term; and
- Payment akin to rent.
...it may be deemed a lease in substance, regardless of its title.
If the agreement is not contracted out of the Landlord and Tenant Act 1954, the occupier may gain security of tenure and the right to renew the lease, which may not have been the landlord’s intention.
Conclusion
Understanding the differences between a lease and a licence to occupy is crucial for both landlords and occupiers in commercial property. Leases offer long-term security and legal rights, while licences provide flexibility but far less protection. Getting this distinction wrong can have significant legal and financial implications.
For tailored advice on commercial leases or occupational agreements, speak to our expert Commercial Real Estate team today.
The information provided in this article is provided for general information purposes only, and does not provide definitive advice. It does not amount to legal or other professional advice and so you should not rely on any information contained here as if it were such advice.
Wright Hassall does not accept any responsibility for any loss which may arise from reliance on any information published here. Definitive advice can only be given with full knowledge of all relevant facts. If you need such advice please contact a member of our professional staff.
The information published across our Knowledge Base is correct at the time of going to press.
