Leases vs Licences
Jasmine Keeble, Legal Assistant | 7th September 2022
There are two common methods of granting occupation of property to a third party; a lease or a licence. These terms are sometimes used interchangeably but there are significant differences in the rights that are implied in law for a lease versus a licence. It is important to ensure that the agreement you are entering into does what you intend it to do and meets your needs.
Lease
In a lease, the Landlord grants exclusive possession of the property for a set period of time. In return, the Tenant pays rent and, where applicable, ground rent and service charge. These terms are a defining feature of what makes an agreement a lease.
A lease can be both contractual in nature and, where the term of the lease is over 7 years, an estate in land capable of being registered at the Land Registry in its own right. Leases will often also include clauses allowing the Tenant to grant an underlease, assign the lease to a third party and make alterations with the Landlord’s prior consent.
Commercial tenants will automatically benefit from security of tenure unless the correct procedure is followed prior to the lease being granted. Security of tenure grants the tenant the right to renew the lease at the end of the lease term, and there are limited circumstances where the Landlord can refuse. This right is implied in law and is not something that can be disregarded if it is not expressly stated in the lease.
Licence
A licence is intended to be used where occupation is required for a short term, it is often used for concession stands within larger department stores or shared office spaces. The person granting the licence is called the Licensor and the person being granted the licence is the Licensee.
A licence does not create an estate in land and is contractual in nature only, this provides less security to the parties when compared to a lease. As such, if the Licensor were to sell its property, the licence would automatically terminate with or without prior notice.
A key component of a licence is that it does not grant exclusive possession of the property and instead grants someone to do something on the property, preventing the act from becoming a trespass.
Issues to be aware of
Regardless of whether the parties intend to grant a licence and the document has been drafted to state that it is a licence, if the agreement grants exclusive possession of the property it is a lease. The case law in this area is very complex, and the potential implications of a licence being deemed to be a lease are far-reaching. It is therefore important that care is taken when drafting and signing a licence to prevent this from happening, and that precautionary steps are taken into account.
If a lease has been incorrectly labelled as a licence, the parties may not be aware that security of tenure has not been excluded. The tenant will then automatically benefit from this right whether or not this is as the parties intended.
A lease may also be registrable at the Land Registry and attract Stamp Duty Land Tax (SDLT) liability. If the SDLT is not paid on time, the tenant will be liable to pay penalties and fines. Even if the document was intended to be a licence, penalties and fines for late filing of the SDLT return may still be applied if it is later deemed to be a lease.
It is important to ensure that you know whether you are entering into a licence or a lease and are aware of the key distinctions between them. Please don’t be fooled, an agreement labelled a licence doesn’t make it one.
If you would like any further information or advice, please contact our Commercial Property team.
