What is the difference between a commercial property lease and a commercial property licence?

When you occupy commercial premises, you may have either a lease or a licence to occupy. Many businesses tend not to worry about whether they occupy commercial premises under a lease or licence but there are several distinct differences that mean it is crucial that you know which you occupy your business premises under and what you are signing up for.

This blog acts as a commercial property agreement guide to help you know your rights when it comes to commercial property and here at Woollcombe Yonge we always suggest getting any licence or lease agreement read over by one of our commercial property experts.

The difference between a commercial property lease and a licence in property law?

Let’s start with what exactly a commercial property licence is and exactly what a commercial property lease is. Both are contractual agreements between the owner and the business but your rights as a tenant can vary depending on which you hold.

It is also important to note that just because your paper document is labeled as a “Licence” or “Lease” it does not mean that it is that, it is the content that matters.

What is a commercial property lease?

A commercial property lease is a legally binding contract that is made between you, the business owner and occupier, and the landlord of the premises, it is an agreement whereby a tenant will occupy a property exclusively, for a fixed period of time.

As with a lease on a residential property, there is a monthly rent to be paid and the lease is often in place for a fixed term but usually of longer duration.

What is included in a commercial property lease?

The lease will state the address, duration that the lease is being held for (it may also cover lease renewal), the rent charged, when it is due and how it should be paid, what type of business can be carried out within the premises, information on the security deposit and who is responsible for improvements that need to be made (the exact breakdown of this may also be included). On occasion the lease may also state whether subletting the property is permissible, who is responsible for insuring the property and details about termination of the lease.

What are the advantages of a commercial property lease?

There is often some room for negotiation with a commercial property lease and less governmental protection as it is understood that if you are capable of running a business you are capable of renting a space to run that business and understanding what you are entering into.

A lease gives the tenant exclusive occupation of the property, it is a formal right to occupy the business premises and is often in place for a longer duration. There are rights that apply, such as those in the Landlord and Tenant Act 1954, so that a landlord cannot simply terminate the lease (except on limited statutory grounds), meaning that you are protected by law.

What is a commercial property licence?

Instead of holding a lease, you may hold a commercial property licence agreement. Commercial property licence agreements grants the tenant permission to do certain agreed activities on a licensor’s property. A licensee will not have exclusive possession. It is also often a shorter period than a lease term.

Short term commercial property licence agreements are common in a serviced office space or as temporary arrangements between a buyer and seller of a commercial property between exchange and completion where immediate access is needed or prior to the grant of a lease where flexible or early access is required.

What are the advantages of a Commercial Property Licence Agreement?

Can be used as a short-term solution until longer term premises arrangements are found.
Can be used whilst a formal lease is being drawn up.
No security of tenure, i.e. there is no statutory right for the licensee to remain in the property once the licence ends. Whilst this may benefit the licensor it may be a disadvantage for the licensee.

Are there any risks in granting a licence to occupy?

A licence agreement is not recommended as a longer term solution when looking for an office space or other business premises or where you are looking to have exclusive use of a premises. You do not have the same rights with a licence to occupy agreement compared to a lease, which can have significant consequences should one party decide they want to terminate the contract.

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

The tenant can terminate the licence agreement at short notice, meaning you may be spending more time seeking tenants.
There are licence agreement costs to be taken into account, although you may choose to pass these on to the tenant.

What are the risks for the tenant (the licensee)?

With a licence to occupy you do not have exclusive possession or exclusive use of the premises, meaning you share the premises with the landlord or other businesses. This may impact storage of equipment etc. all of which need to be taken into account.
You are only allowed to use the property for the predetermined activity outlined in the licence agreement, carrying out any other business or activity leaves you in breach of your licence.
The use of the property ends immediately when the licence period runs out, there is no ‘right to remain’ as there would be with a lease.
Just as the tenant can terminate the licence at short notice, so can the landlord making them highly unstable, with no obligations under the Landlord and Tenant Act 1954 about the process for ending the licence.
There is no rent control with a licence to occupy, meaning that rent can be increased without a notice period.
There are often other fees such as a licence fee that may be passed on and service charges on top of rent to be considered.

How we can help with commercial property licences at Woollcombe Yonge

Here at Woollcombe Yonge, our expert legal advice will leave you with complete peace of mind that you have made the right decision for your business and its premises.

Whether you are a landlord or tenant, our commercial property team will happily look over any licence agreement or lease and point out the pitfalls to you, break down any legal terminology that can be hard to get your head around and ensure a well drafted licence agreement has been prepared.

Contact us online or call us on 01752 660384.