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As a business owner, having a commercial space may be an essential part of your business operations. However, it can carry a significant financial expense. As a result, reviewing your agreement with your landlord and understanding its terms is essential. In particular, you should consider your business’s needs and understand the different property options available to you, including commercial leasing and licensing. In the UK, there are distinct differences between a commercial lease agreement and a licence agreement. This article will explain the difference between commercial lease and licence agreements to help you consider what fits your needs best.
What is a Commercial Lease?
A commercial lease is when you have exclusive occupation of a premises for your business use. In return, you will pay an agreed amount of rent to your landlord, which you must do at a specific time and manner, or you could incur penalties.
The significant element of a commercial lease is that you enjoy exclusive possession. This means you enjoy the legal right to occupy the commercial property exclusively. Therefore, you have the right to occupy the space the lease covers and can:
- exclude the landlord from the commercial property; and
- exclude any other third party from the property.
A commercial lease also creates a legal interest in the land. As such, while you are the commercial tenant, the existence of your lease has a bearing if the land is sold. Also, the lease can be bought or sold during your lease term.
What is a Lease Agreement?
A lease agreement is a legal contract. It is a legally binding document that contains the rights and obligations of both you and your landlord. Both parties must adhere to these during the lease, and neither party can amend the lease terms unless you both agree.
A commercial lease agreement is a fixed-term contract between you and your landlord or licensor. It grants you the right to occupy the property with exclusive possession for the time the agreement states. In return, you must pay your landlord for this privilege. The lease end date is when your right to occupy the property usually expires.
The rights and responsibilities of you and your landlord will be in the lease agreement. That can include:
- the rental amount due by you;
- when your landlord has a right to enter the property; and
- strict eviction procedures.
Additionally, you will often find in your commercial lease that your landlord reserves rights to the commercial property. This may be, for example, the right to enter to carry out necessary maintenance on the premises. Therefore, although you enjoy the freedom to exclusive occupation, this can be affected in situations when your landlord can enter regardless of whether you wish them to or not.
This cheat sheet outlines what you should be aware of in your lease agreement.
What is a Commercial Licence?
A commercial licence is very similar to a commercial lease. It also concerns your occupation of commercial property for your business purposes. You may also pay money to your landlord or licensor as the tenant or licensee to use the space to conduct your business activities. However, you generally refer to this payment as a licence fee. This differs from a commercial lease, whereby your payment in exchange for occupying the property is known as rent.
A significant element of a commercial licence, and one which distinguishes it from a commercial lease, is that you do not, as the tenant or licensee, enjoy the exclusive occupation of the commercial property. Instead, you have ‘mere permission’ from your landlord.
Due to these reasons, licence agreements are usually common for short-term or temporary arrangements.
When negotiating the licence agreement, you can agree on what activities you can carry out on the premises. In reality, this means that:
- you have permission to be on the property rather than find yourself a trespasser;
- you do not have the right to exclude the landlord from the commercial premises; and
- you also do not have the right to exclude any other third party.
What is a Licence Agreement?
A licence agreement is a right to occupy land personally but does not grant you exclusive possession. Therefore, your landlord can enter your business premises should they wish to. It permits your business to occupy the land or do something specific rather than be a trespasser. Additionally, if it includes a fixed period, this is generally a short one.
A licence often has fewer rights and obligations than a commercial lease. Likewise, your landlord can give notice and revoke it. The law does not strictly govern a commercial licence agreement in the same way the Landlord and Tenant Act 1954 protects a commercial lease agreement.
Further, a licence agreement can provide flexibility between you and your landlord as the conditions are less strict, meaning you can more easily terminate the contract.
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What Are the Key Differences Between Leases and Licences?
The table below summarises the main distinctions between a commercial lease agreement and a commercial licence agreement.
| LEASE AGREEMENT | LICENCE AGREEMENT |
| A lease is a commercial contract that outlines your rights and responsibility to occupy premises. | A licence is a contractual, personal right to occupy the property and do something specific on the property. |
| There is typically a timeframe in a lease agreement called a fixed term. | Usually, there is no set time for occupation, but where there is, this is short. |
| With a lease agreement, there is a legal interest in the property. | There is no legal interest in the property with a licence agreement. |
| You enjoy exclusive possession with a lease agreement. | You only enjoy a right to occupy with a licence agreement, so the landlord can enter the property as they wish. |
| This can be bought or sold. | You cannot buy or sell a licence agreement as it does not grant a legal interest in the land. |
| A lease agreement provides rights and responsibilities for you and your landlord. | Few, if any, property rights accompany a licence. |
| You usually enjoy the security of tenure with a lease, so you have the right to remain in the property. | A licence has no security of tenure, so your occupation ends when the licensor has no interest. |
| A lease agreement has strict terms and protections. | There are less strict terms with a licence agreement, so there is greater flexibility. |
Which Option is Best?
Ultimately, choosing between a commercial lease agreement or a licence agreement will depend on your business needs and possibly your business type. You will also need to consider what you wish to do with the property as your commercial premises.
You might decide that a commercial lease is right for your business. This may be because the right to exclusive occupation is crucial to your business activities. For example, you may have numerous employees who require guaranteed space to carry out their work. Additionally, you may meet with clients and need a private space to conduct meetings.
Also, a commercial lease agreement grants you exclusive property rights similar to those the landlord has as a property owner. So, if you plan to make money from your business premises through a sublet, with your landlord’s permission, a commercial lease allows you to do this.
On the other hand, a commercial licence may suit your business better than a lease. For example, you might operate the business as a sole trader or your work is mostly online. In this case, a licence agreement may be more suitable, as you do not need a large space to run your business. If you are a business with hot desks in a commercial space, you may have a licence rather than a lease.
Key Takeaways
Having land to conduct commercial operations is a core part of running a business. As a business owner, your right to occupy the land may be goverened by a lease or licence agreement. However, these two types are not the same. A lease agreement grants you exclusive occupation of the property and legal interest in the land. A lease agreement only grants you the right to occupy or use the property for a specific reason. Furthermore, a lease agreement will normally have a long, fixed-term timeframe. In contrast, a licence agreement has a short timeframe, if any. When drafting and reviewing your agreement, you should be aware of these differences and ensure your business interests are protected by choosing the type most suitable to you.
If you need help understanding your lease or licence agreement, our experienced leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A lease agreement is a contractual agreement between you and your landlord. It allows for your exclusive occupation of premises for a fixed term and includes rights and responsibilities for you and your landlord in return for your payment of rent.
A licence agreement is a contract between you and your landlord but on a personal level. It allows you to occupy a premise for a set time but not as an exclusive occupation.
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