When it comes to occupying commercial space, business owners need to know the legal basis of that occupation to avoid operational difficulties, disputes, and unintended consequences further down the line.
A common view is that if the premises are relatively small, the period of time it going to be occupied short, or the “rent” low, then less attention needs to be paid to the legal issues and the arrangements between the landlord and tenant can be relatively casual.
However, this is a mistaken belief, as the most apparently insignificant of occupations can cause issues. There are various options when it comes to letting commercial space – lease, licence, or a friendly handshake with nothing in writing.
Leaving aside the undocumented option (which is never advisable), we look at the advantages and disadvantages between leasing and licencing.
What is a commercial lease?
A lease gives the tenant an interest in the property and the right to occupy it for the term, subject to paying rent and commonly, a service charge.
The key points to note are:
- A lease gives the parties certainty, as it sets out who is responsible for what, such as repairs and maintenance, and enables the parties to plan ahead and budget for property-related costs
- It imposes obligations on the landlord to ensure the tenant can enjoy the premises without interruption and often requires the landlord to provide certain services for the benefit of the tenant
- The Landlord and Tenant Act 1954 gives tenants of leases security of tenure unless it is excluded lease agreement - it’s, therefore, essential that, before the lease is entered into, the parties address this issue and reach an agreement
- The lease can contain break clauses, to bring the term to an end early, giving the parties flexibility, whilst retaining certainty
What is a commercial premises licence?
A licence creates permission to occupy a property or part of a property. They’re best used for short-term occupancy or for sharing arrangements (e.g. coworking space). As a licensee, you will not enjoy ‘exclusive use’ of the property and cannot pass your licence rights onto another person.
What is the difference between a commercial property lease and a licence?
The main difference between a lease and a licence is ‘exclusive use’.
If your contract states that you can refuse the landlord entry to the property, the agreement is almost certainly a lease. However, as case law shows, the line between whether a business tenant has a commercial lease or a licence can be blurry.
Even if the parties call a document a licence and intend it to be such, there is a real risk that what has been created is, in fact, a lease, if the following criteria are met:
- Exclusive possession
- Licence fee/base rent
- Fixed term
In London College of Business v Tareem (2018), the College was allowed to occupy premises on the basis of a “licence”.
A dispute arose and the licensor changed the locks. The Court required the licensor to allow the College back into occupation, the College claimed wrongful exclusion and damages, and it was held that a lease, not a licence, had been created, and the College enjoyed the security of tenure under the Landlord and Tenant 1954.
What are the advantages of leasing a property?
The advantages of leasing property are:
- Provides you with Security of Tenure under the Landlord and Tenant Act 1954, unless you choose to contract out of the provisions (Security of Tenure gives a commercial lease tenant the automatic right to renew their lease under similar terms once it comes to an end)
- The landlord can only refuse to renew the lease under limited circumstances prescribed by the Landlord and Tenant Act 1954 (this ensures that you, as a tenant, have peace of mind, knowing that you will not have to find alternative premises once your existing lease expires because your landlord decides not to renew your lease or changes the terms to such an extent they are detrimental to your business)
- Compared to purchasing a commercial property, the upfront costs of entering into a commercial lease are relatively low (this frees up capital that can be invested in your business)
- Depending on the type of lease you enter into and how robustly you negotiate terms, much of the responsibility for the repair and maintenance of the property will fall to the landlord
What are the advantages of licencing property?
Commercial property licences are ideal if you require short-term use of a space and ‘exclusive use’ is not necessary during that time. Licences are also considerably more flexible than commercial leases and the typical notice period for either a landlord or tenant to terminate a licence is 28 days.
How can I tell if I have or am being offered a commercial property lease or a licence?
Ask yourself the following questions:
- Will the occupier have exclusive possession of the premises?
- Will a "rent" be paid?
- Will the occupation be for a certain amount of time?
If the answer is "yes" to some or all of these questions, then what is being granted may be a lease and you need to take legal advice.
Remember it doesn’t matter what you and the landlord call the agreement, as the Court can look beyond this to see what is happening in practice and decide that, whilst called a licence, what has been granted is, in fact, a lease.
Get legal assistance from LawBite
Navigating commercial leasing can be a daunting task, but it doesn't have to be when you have the right legal guidance. LawBite’s experienced property lawyers can provide you with the necessary legal advice and representation to safeguard your interests and ensure a smooth occupation of your commercial premises experience.
Whether you're a tenant or landlord, we're here to help you navigate complex commercial property laws and resolve any disputes that may arise. Don't hesitate to schedule a free 15 minute consultation or call us on 020 3808 8314.