Why the choice between lease and licence is so important
The reason why you need to choose the right type of agreement is that if you get it wrong and use a licence when you should have used a lease, you will have none of the landlord rights that your lease agreement would have contained.
You'll have someone in your property who you cannot evict and on whom you cannot enforce payment of rent. Eventually you could rectify all of this but only after court proceedings and heavy fees.
In other words, a poor decision may leave you stuck with squatters to whom you have given possession. You are unlikely to have control over what they may do in the property, and the value of the property will fall. If you have borrowed money against the security of your property, you will probably also be in breach of the mortgage terms. That would enable your mortgagor to step in and take control and sell your property.
When you can use a licence
A lease is very specifically defined in legal terms, since right back in 1925. A licence is not defined in law. A licence is simply a deal in any terms whatever. You can do what deal you like, but if your terms look like a lease, the Court will say you have created a lease. It is rather like the old expression 'if it has four legs, barks like a dog and wags like a dog, it probably is a dog'. Calling it a hamster will not change the fact that it is a dog.
No exclusive occupation
The purpose of the law is to give protection only to business tenants. It follows that if your proposed occupier will never use the premises for a business purpose, they have no protection and you can make whatever deal you like with them. You are not restricted in any way and the distinctions we make in this article are irrelevant to you.
As long as you are sure they will not use the property for business, you could license:
- a field to graze horses or use for jumping practice, or biking
- your garage to store goods
- your pond for fishing
If you trust the occupier
You are also safe to use a licence when the purpose of the occupation really has to be for a very short time. For example a business operating shows and events is unlikely to overstay a five day licence and decide to run their business from your field instead of their offices in Brighton.
Not occupying, just taking a crop
One to watch is a grazing agreement, where special conditions might apply. For everything else, use a lease agreement.
When is a licence really a lease?
The main factors which indicate the relationship to be a lease as opposed to a licence are:
Exclusive possession
If the owner retains (and exercises) the right to access any part of the property at any time that would tend to indicate a licence. On the other hand, if the tenant has the key of his door and no one may enter without their permission, that would be an indicator for a lease.
A lease gives the tenant exclusive possession of the land for a fixed period of time with the intention to create a legal interest in the land. That interest can be sold, sub-let, mortgaged or licensed, subject of course to the terms of the lease.
Length of term
A fixed term of any length indicates a lease (the point of a licence is that it is totally flexible and can be terminated without notice or with very short notice).
Rent and services included in the fee
If you let the property for a fixed rent exclusive of services, which the tenant must arrange and pay for, the arrangement is likely to be a lease.
The getup of the document and the terms in the round
If the arrangement you make is more or less the arrangement that someone else might call a lease, then yours is a lease. The decision is for the Court, not for you.
But always remember, as we said above, only a business occupier has protection.
When to use a licence and a lease agreement?
In deciding whether to create which relationship; you should look at what you and your counter party have existing and future plans. The interests of the parties can be and are usually opposite.
You may be interested to look at our commercial property licence agreements.
We may be able to draft a lease for you but if you prefer to use a document template, we offer alternatives of business lease agreements each of which is drawn to cover a specific set of terms and property variations.