Licence to occupy commercial property

What is the difference between a lease and a licence to occupy?

A body of case law has developed and has established that even if a document calls itself a licence, if it has the characteristics of a lease, then it will be deemed to be a lease. Because a document is labelled a licence, it doesn’t make it so.

The key factor in determining whether an arrangement is a lease or licence, is whether the party occupying a premises has a right of ‘exclusive use’. If the party occupying the premises can lock the owner of the premises out, it will generally be deemed to be a lease and not a licence.

Are there any risks in granting a licence to occupy?

Even where parties have intend to enter into a licence to occupy, there is a risk that it is deemed a lease.

Licences are often, but not always, short term. The occupation is unsecure and can usually be terminated at short notice.

When would a licence to occupy be useful?

A licence to occupy is a useful arrangement for a property with multiple users or where the owner requires flexibility.  

Licences to occupy are commonly used in the following circumstances:

• Serviced office space on a short-term basis
• Between a buyer and a seller of the property in the period between exchange and completion
• Prior to the grant of a lease when the parties are negotiating the terms of the lease, but early access to the premises is required
• Store concession arrangements

What are the risks for the person with the benefit of the license (the licensee)

The licence is intended as a permission. The proposed or continuing use of a property is subject to the owner’s continued permission, which can usually be withdrawn on short notice.

The licence is contractual and doesn’t have certain legal protections afforded by leases, including the right to remain in the premises and renew its tenancy at the end of the term, known as ‘security of tenure’.  

What are the risks for the property owner (the licensor)

If a licence is improperly drafted, there is a risk that the licence could be construed as a lease, allowing the occupier to become a tenant and benefit from the right to remain in occupation and to renew. This could have significant consequences for the owner and limit their ability to use the property for its intended purposes in the future.

How to terminate a licence to occupy

There is no set legal requirements for terminating a lease. A well drafted licence usually sets out the requirements to terminate which should be strictly followed. Ordinarily, the requirements are for notice to be given in writing, a number of days or weeks before the licence should come to an end.   

Can a tenant grant a licence to occupy?

A tenant may be able to grant a licence to occupy although this is usually prohibited by the terms of a tenants existing lease, or is permitted but only with the landlords express written consent which may be subject to conditions.

Licenses and deposits

There are not usually requirements for any deposit paid. Where a deposit is paid, the deposit protection schemes available to residential tenants do not apply.

Costs associated with a licence to occupy

Ordinarily costs associated a licence to occupy are lower than those for a lease. Generally, a licence to occupy will be shorter than a lease. It is usually entered into without the level of investigation undertaken when entering into a lease or buying a property.   

Who meets the cost of preparing and completing the licence is down to negotiation although it is usually the party requiring the licence that must meet the fees. It is also not uncommon that each party meets their own costs.