Understanding the differences: Lease vs Licence to Occupy for real estate

A question which is regularly asked by property owners is “We have found a new tenant and need to get them in and trading as soon as possible. Can we grant a simple licence to occupy?”. As always in this wonderful world, the answer is “It depends...”!

A Licence to Occupy is viewed as a quick solution, but it can result in costly situations if the relationship between owners and occupiers breaks down, particularly when the owner needs to take back possession of the property and the occupier refuses to leave – what could have been viewed as a cost-effective and timely solution initially, may in fact result in lengthy and sometimes very expensive litigation. The key point here in determining who is in the stronger position legally is how the occupation has been documented (i.e. whether the document is interpreted as a lease or a licence). You cannot simply rely on what the document is called; the facts and nature of the occupation are key.

The main points to note when considering whether the occupation is under a Lease or a Licence are (a) whether the occupier has exclusivity i.e. can the occupier prevent the owner from entering the property (b) whether the arrangement is for a fixed term - an open-ended term leans more towards the arrangement being under a licence agreement and (c) who retains control over the property and are there any restrictions on how the occupier can use it (i.e. no alterations) and share it with other occupiers (i.e. perfume concessions on the ground floor of a department store).

What is a Lease?

A Lease is a legally binding contract that grants a tenant exclusive use of a property for a specified period of time, often 5 or 10 years. A Lease is typically more formal and provides the tenant with more rights and responsibilities. The terms of a Lease are fixed and cannot be changed unless both parties agree to a modification.

What is a Licence to Occupy?

A Licence on the other hand is a more informal arrangement that grants a tenant permission to use a property for a specified period of time. Unlike a Lease, a Licence does not grant exclusive possession of the property and can be terminated by a landlord at any time. Licences are often used for short-term or temporary arrangements, such as renting a parking space or using a commercial space for a pop-up shop.

The differences between a Lease and a Licence to Occupy

One of the main differences between a Lease and a Licence is the level of control a tenant has over the property. With a Lease, the tenant has exclusive possession of the property and can generally use and alter it as they see fit, as long as it does not breach the terms of the Lease. With a Licence, the landlord retains greater control over the property and may place restrictions on how the occupier can use it.

Another key difference is the legal rights and protections afforded to the tenant. Tenants under a Lease typically have more rights, such as the right to renew the Lease, the right to quiet enjoyment of the property and protection from sudden rent increases or eviction without cause. Tenants under a Licence have fewer rights and protections, as the agreement is more informal and can be terminated more easily by the landlord.

In conclusion, while Leases and Licences both allow tenants to occupy a property for a specified period of time, there are significant differences in the level of control, rights, and protections afforded to the tenants under each agreement.  It is important for landlords and tenants to understand these distinctions in order to make informed decisions when entering into a rental agreement.

How we can help

Our Commercial Property team at Boyes Turner can assist you with identifying the appropriate documents for your intended transaction. Contact our experts today.