Business lease or licence?

Article reference: UK-IA-LSE22
| 5 min read

Why the choice is so important: Lease or Licence?

The reason why choosing the right type of agreement is so important is that if you get it
wrong, you have none of the rights that your lease agreement would have contained, if
you had used one. The position will simply be that someone is in your property and you
cannot get him out nor can you enforce payment of rent. Eventually you could rectify all
of this but only after court proceedings and heavy fees.

You are 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, he has no
protection and you can make whatever deal you like with him. You are not restricted in
any way. The distinction we make in this article are irrelevant to you. As long as you
are sure he 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 his permission, that would be an indicator for a lease.

In summary, 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 (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: If you let the property for a fixed rent exclusive of services, which the tenant must arrange and pay for.
  • 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 also be interested to look at the documents we offer at: Commercial property
Licences

You may use a business lease agreement:

For anything else, consider using a business lease agreement. You may be interested
to use our business lease agreement drafting service but if you prefer to use a
document template, we offer alternatives of business lease agreements or commercial
lease agreements
each of which is drawn to cover a specific set of terms and property
variations.

Please note that the information provided on this page:

  • Does not provide a complete or authoritative statement of the law;
  • Does not constitute legal advice by Net Lawman;
  • Does not create a contractual relationship;
  • Does not form part of any other advice, whether paid or free.
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