Granting a lease or a licence – What do I need to know?

Some landlords are under pressure to avoid having empty premises and secure some income.

That urgency can sometimes lead to hasty decisions about whether to grant a lease or a licence, which can cause problems down the line.

Knowing how each works helps you avoid disputes and protects your property.

Understanding the difference between a lease and a license

A lease grants exclusive possession – a right for a tenant to occupy property or land without interruption from the landlord.

The landlord may still have a right of access under the lease but this is often on reasonable notice and is restricted. The tenant does not share occupation with the landlord or any other party.

A licence does not grant exclusive possession. It is a permission for a licensee to occupy a property or land but does not exclude the landlord from entering the land and sharing the land with the licensee.

Another difference is that under a lease a tenant pays rent. Under a licence there is no rent (although there may be a licence fee).

Some documents are called a licence but appear to grant exclusive possession and under which the tenant pays rent.

Courts look at the substance of the arrangement rather than the label used so a document called a licence may in reality operate as a lease.

This often leaves the landlord with far fewer options if the relationship between the occupier and landlord breaks down and may also create security of tenure for the occupier.

A lease is subject to Stamp Duty Land Tax (SDLT) but a licence is generally not. Poorly drafted licences may in fact be regarded as a lease and may therefore attract SDLT.

When is a lease the best choice?

A lease suits situations where the occupier needs firm control of the premises for a longer period of time. Retail units, offices, restaurants, warehouses and industrial units usually fall into this category.

A lease provides the occupier with certainty, making long-term planning easier as they know exactly how long they can use the space for and for what.

Leases are usually for a minimum of a year and often for a term between 3-10 years.

When is a licence the best choice?

A licence suits a short-term or flexible occupation where control needs to remain with the landlord or where an occupier only needs a property or land for a short period of time.

For instance, taking a storage site for a few months, hiring a meeting room for a single day or taking a desk in a shared office where users come and go and facilities are shared.

Temporary storage can also be handled through a licence. A business that needs extra space for a limited period during a busy season may store goods in a corner of a warehouse without taking exclusive possession of the entire area.

The license arrangement can end more easily than a lease. There are no statutory renewal rights, so the occupier must leave once the licence period has ended.

The licence terms would still cover use, access rights, covenants, insurance and payment of utilities, rates and service charges.

The challenges occur when a licence is used for a situation that clearly requires exclusive possession.

This often happens where an occupier is placed in a self-contained unit under a licence for ease rather than what is appropriate to the circumstances.

This creates risk for the landlord because the occupier may claim rights they were never intended to have.

Should I grant a lease or a license for my commercial property?

The answer simply depends on the situation of the parties, what the occupier is looking for, what the owner will agree and the use of the property or land.

However, we can tell you that landlords who take advice before granting either one avoid mistakes that can be costly to fix later.

Our solicitors will provide tailored guidance to ensure that the chosen arrangement matches the intended use and that the legal effect is understood by all parties.

If you are considering granting a lease or licence and want support through the process or more information, contact our commercial property team.