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Commercial landlords and tenants alike need to understand licensing in UK commercial leases and the value of a licence attached to a commercial property. Premises licences greatly benefit hospitality, entertainment and, in some cases, retail businesses. For instance, restauranters looking for new commercial premises will be attracted to properties that have a license to sell alcohol. Commercial premises with a license attached are also very attractive to commercial landlords. This is especially so when commercial tenants lease their property out to a new commercial tenant. This article will explain what landlords and tenants need to know about licensing in commercial leases in the UK.
Licences
Commercial lease agreements may contain a licence provision. A licence provision grants the business tenant who occupies the property the right to sell and/or serve alcohol. For restauranteurs, this is particularly advantageous to their business activity.
Where a commercial premises does have a licence attached to it, it is what you term an ancillary asset to the commercial property. An ancillary asset is an asset to the property which helps to support its primary role. So, in this case, the licence supports the commercial property as commercial premises as a restaurant business.
The licence is part of the property’s capital value and often a significant amount of it. If you are a landlord and your commercial property is set up expressly as a restaurant, the licence is of substantial value. In contrast, the landlord is unlikely to get a restauranter commercial tenant if the premises does not have a licence.
Ownership
As a licence with a commercial property is an asset, it may be tempting for a commercial landlord to state in the lease that the premise’s licence is their property. However, commercial landlords should refrain from doing so as this will negatively affect their commercial tenants. Commercial tenants in a lease enjoy sole possession of the property and, by extension, the license, as the license is a property asset. If you, as the commercial landlord, try to assert ownership of the licence, it will affect the commercial tenant if they wish to either:
- sell their business; or
- assign the lease.
In either scenario, the incoming tenant to the lease would expect the licence with the lease. If the lease is without a licence, it is not entirely effective.
The landlord would do better to have a provision in the commercial lease agreement requiring the tenant to both:
- pass the lease back to the landlord at the end of the lease term; and
- vacate possession of the commercial property.
Protection
Landlords who attach a licence to their commercial property make their premises more attractive to prospective tenants. Restauranter commercial tenants will likely benefit most from the licence as they can then serve alcohol to their patrons. Licenses though are also valuable to the landlord as they increase the commercial property’s value. A landlord will, therefore, want to protect their licence.
It is wise for a commercial landlord when they draft a commercial lease to include precision in the lease agreement to protect their licence. This can protect against, for example:
- any loss; and
- specific variations by the commercial tenant, which may cause the licence value to decrease.
An example of protecting the property’s licence from variation could include prohibiting the tenant from changing the licence to reduce the premises’ serving hours. A landlord would benefit from this protection as a licence granting the venue the right to serve alcohol till late hours is highly sought after.
However, protection placed on a licence as part of a commercial lease agreement should not unfairly impact the tenant. The commercial tenant must not be prevented from carrying out the agreed business activity at the premises.
Termination
When a commercial lease has a licence, the lease agreement may contain a provision about termination of the lease agreement in connection with the licence. This may state that the landlord has a right to terminate the lease if something occurs that jeopardises the purpose of the licence. For example, suppose a commercial tenant was convicted of a crime, and this affected the use of the premises licence. A commercial landlord may be entitled to terminate the lease to protect the property’s licence.
This cheat sheet outlines what you should be aware of in your lease agreement.
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Key Takeaways
It is beneficial for commercial properties suited for restauranters to have a licence attached to the property. Without the licence, attracting commercial tenants will be difficult, as the ability to sell alcohol is often essential. As the licence is an asset to the property, a landlord must know how to protect it and allow the tenant to use it for their business needs. For example, a commercial landlord must cover the licence for loss and variations. However, the commercial landlord should not protect the licence to the extent that the tenant cannot do business. A landlord may also be able to terminate the tenancy early if the tenant jeopardises the licence.
If you are a commercial landlord or tenant who wants to know more about licensing in UK commercial leases, 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.
Frequently Asked Questions
A licence with a commercial lease can be, for example, a property with a licence to sell alcohol and open late.
Where a commercial landlord’s property has a licence with it, the landlord should not state that they own the licence. This prevents the tenant from keeping it with their business when they sell it or with the lease if they assign it.
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