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When you decide that you wish to get your commercial premises, you will have many things to consider. Some of these factors include the size of the business premises you require and the desired location for your business. In addition, you will need to consider how much your business can pay in rent for use of the premises. You may overlook a critical factor when choosing commercial premises; the contract you enter into to secure the premises. To secure commercial premises, you may enter into either a license or lease agreement. You may enter into a fixed-period licence agreement. On the other hand, you may enter into a commercial lease agreement that grants you exclusive possession of the property. There are various reasons why one may be better than the other for your business needs. To help you decide, this article will explore reasons a business owner might choose a licence over a commercial lease.
Licences and Leases
Licence agreements and lease agreements are legally binding contracts. These documents set out both parties’ rights and obligations regarding the commercial property. Under both agreements, you, as the business owner, are able to carry on your permitted business activity at the designated premises. In exchange, you, as the business owner, must pay a regular fee to the commercial property owner. The fee in a licence agreement is referred to as a “licence fee”. Under a commercial lease agreement, the fee that must be paid is rent.
Notably, there are key differences between licences and leases as they relate to commercial property use. For example, a commercial lease allows you sole occupation of the commercial property. Sole occupation means that no one else can enter, except your landlord, unless you permit them in limited circumstances. Similarly, a licence agreement permits you to conduct your business activities on the commercial property. However, you do not receive the right to exclusive possession.
Below we consider three reasons you may choose a licence agreement over a commercial lease:
1. Flexibility
As a business owner looking to carry on your business at a particular commercial property, you may prefer to enter into a commercial licence agreement. Licence agreements offer your business more flexibility in contrast to commercial lease agreements. For instance, you may prefer a licence agreement if your business is a startup. Startups generally are cost-aware and can be unpredictable. With having a licence agreement in place, your business has more flexibility to respond to changing business circumstances.
Conversely, business and property owners tend to enter into a commercial lease long-term. Your commercial lease agreement will have a fixed term end date, which you and the property owner commit to. Should your business not progress satisfactorily, you may be in a long-term lease agreement which you can no longer afford. A commercial lease contains strict conditions about termination of the lease for both parties.
A commercial licence, however, allows you or the property owner to end the licence when either of you wish. Generally, a short notice period of only one week is required to terminate a licence agreement validly. From the property owner’s perspective, this may be advantageous as they can find a new business that may pay a higher licence fee. Likewise, as the business owner, you have peace of mind that you are not committed to a long-term contract. Changing business circumstances may mean you are not able to honour the contract. Unlike a lease agreement, though, you have greater flexibility regarding the termination of the agreement.
2. Repairs and Alterations
A commercial lease agreement may contain onerous repairs terms that significantly burden you, the commercial tenant. These repair responsibilities could be quite taxing and burdensome on you, the business owner and commercial tenant. However, a licence agreement usually has less onerous conditions attached to it. Consequently, a licence agreement may be a better option for you as a business owner.
A licence agreement may better suit you if you need to alter your potential commercial premises. You may decide to carry out a fit-out of the commercial space so it is suitable for your business activities. Through a licence agreement, you and the property owner can arrange this easily and quickly.
3. Trade Needs
As a business owner, you will want to choose a commercial premises that is suitable for your business activities. If you run a seasonal business, this is especially relevant. For example, suppose you own a retail business that sells Christmas goods. Over the December period, your business may have a substantial trade volume. However, your trading volume will likely be low during the quieter months. In such cases, leasing a commercial premises would not be viable due to the cost factors.
If you chose to commit to a commercial lease, you would still have the right to sole occupation of your business premises. Unfortunately, you would still have to pay rent when you could not afford it. However, under a licence agreement, you could conduct your business activities on the premises for the short Christmas season.
This cheat sheet outlines what you should be aware of in your lease agreement.
Key Takeaways
Finding the right commercial premises for your business is no easy feat. Assuming you have found the right premises, you have a key question to consider. Do you conduct your business activities on the premises under a licence agreement or lease agreement? Licence agreements and lease agreements are quite similar. Both these agreements grant you the right to conduct your business activities at the commercial property. However, licence agreements are more flexible in nature. The repair obligations are less onerous and you have greater freedom to make alterations to the commercial premises. Additionally, a licence agreement may be more suitable to your trade needs. This is particularly so if your business is seasonal.
If you are looking at commercial property to conduct your business out of and cannot decide whether a licence or lease agreement suits your specific circumstances, contact our experienced leasing lawyers 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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Frequently Asked Questions
A commercial lease is where a commercial property owner grants a commercial tenant the right to sole occupation of their commercial premises. The commercial property owner does so in exchange for rent to be paid by the tenant.
A commercial licence is where a property owner gives a business owner permission to carry out specific business activities on their commercial property. Unlike in a lease agreement, the business owner does not have the right to sole occupation of the premises.
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