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As a business owner, you may need a dedicated space to run your business. Popular options are entering a commercial lease or a licence. A lease agreement grants you exclusive use and a licence to occupy commercial premises for a fixed term in exchange for rent. This article will explain three key reasons business owners prefer a commercial lease over a licence.
Difference Between a Lease and Licence
A commercial lease is a legally binding agreement between you (a business owner and the commercial tenant) and the property owner who becomes your landlord. You will have exclusive possession when you occupy their commercial property for an agreed time, which is the lease term. A lease agreement will detail the rights and obligations of both parties to the lease, such as the rent amount and repair responsibilities.
A licence is also a legally binding agreement between you and the owner of the commercial building. You become the licensee and the property owner, the licensor. With a licence, similar to a lease, you will occupy a property for a specific time. In return, you will pay a licence fee. However, your right to occupy a property comes from the property owner’s personal permission to let you carry out agreed business activities. Notably, you do not receive exclusive possession.
Why Choose a Lease
We unpack three key reasons business owners may choose a commercial lease over a licence.
Exclusivity
Entering a commercial lease gives you exclusive possession to use the property for an agreed period. Exclusive possession means you can enjoy the premises without interruption from your landlord. Likewise, your landlord cannot enter the property without your consent. You and your landlord often agree to periodic inspections during your lease term, though a landlord can never enter the property without your permission.
Conversely, a licence only permits you to conduct an agreed business activity. While you carry out your business activity on their premises, the property owner can enter and occupy it with you whenever they wish. An example might be a license to use a section of an office or coworking space.
Interest in Land
As a business owner, you may prefer a commercial lease over a licence because the former offers you an interest in the land. This interest involves exclusive possession of the commercial property and sole occupation.
With exclusive possession, you enjoy the right to the land like the property owner. Likewise, you also have the right to make specific alterations. Making alterations can give you an interest in the land, so if the property owner sells the land, your lease continues and passes to the new property owner. Your lease is only affected by a landlord change, so the lease terms and conditions remain the same. Therefore, you will continue to trade on the commercial premises.
A licence, however, does not offer an interest in the land. Accordingly, if the licensor decides to sell the commercial property, you immediately lose the right to occupy it and find yourself without a space to run your business.
Security of Tenure
A third key reason a lease can be more beneficial is that it might offer security of tenure. Not all commercial leases provide this, but where they do, it is a definite incentive for a business owner. Security of tenure makes a commercial lease a protected lease. A protected lease means you enjoy the automatic right to lease renewal when your lease term ends. Consequently, unless your landlord claims one of the few legal reasons not to renew your lease, it automatically renews on the same terms.
However, a licence to occupy does not offer this protection. Instead, with a licence to occupy the commercial property, you do so at the licensor’s pleasure. As such, you can only occupy the property for as long as they wish. Anytime they do not want you to stay, they can revoke it.
This cheatsheet includes practical tips to understand key clauses and avoid disputes in leasing agreements.
Key Takeaways
Having a dedicated space to operate your business can be critical to its success. Whether you need a store to sell products or a space to meet clients, having commercial premises is beneficial. While you can choose between a commercial lease or a licence, a lease may offer more benefits to you. Compared to a licence, a lease can grant you exclusivity, interest in land and security of tenure.
For more information about entering a commercial lease or licence, 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.
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