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Lease or licence?

View profile for Sophie Read
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A licence is a personal right granted by a licensor to a licensee to do something which would otherwise be a trespass.  This could be in the form of a grazing licence, licence to occupy property or licence to use a right of way amongst many other types of licence.

There are certain crucial differences between a true licence to occupy property and a lease agreement. A licence is a personal arrangement between the parties which is not a proprietary interest in land and therefore will not bind the licensor’s successors in title if the property is sold. Further a licence can generally be terminated by either party on short notice and the licensee does not have exclusive possession and will not benefit from security of tenure.

By contrast, a lease grants the tenant exclusive possession for a certain period of time usually in return for a rent. The lease is a proprietary interest in land which is usually capable of being assigned by the tenant and the landlord’s successors in title will be bound by the terms of the lease if the property is sold. The tenant may also benefit from security of tenure if they occupy the property for the purposes of their business, meaning they have a right to renew the lease at the end of the term.

There may be good reason why a licence or lease is preferred by the parties in the circumstances. Licences are often thought of as a simpler, quicker, and cheaper solution to putting in place a lease and may be beneficial for a short-term arrangement. However, a licence will not generally provide the licensor with a reliable income stream for a fixed period and so may not be acceptable to the licensor’s lender on a refinance of the property and for the same reason a future buyer looking for an investment property may require a formal lease agreement to be in place, not a licence.

A cautionary warning when looking at or considering a lease or licence, is that an improperly drawn up ‘licence’ may be construed as a lease and then the very reason for choosing a licence in the first place may not apply and it may prove difficult for the licensor to regain possession of the property. If a document labelled a ‘licence’ satisfies the requirements for a lease i.e. if exclusive possession of the property is granted for a fixed period of time reserving a rent, it may be a lease. Licences may still be for a fixed period of time and reserve a rent in the form of a licence fee and so the deciding factor as to whether the agreement is a lease or licence is usually whether exclusive possession is enjoyed by the licensee.

Exclusive possession means the ability of a person to exclude all others from the property in question. If the agreement gives the licensee possession of a defined area and reserves only specified rights of entry in favour of the licensor that may indicate the licensee has exclusive possession. By contrast, if the licensee does in fact share possession of the property with the licensor or other third parties or perhaps only has the right to occupy the property on specific days or during specific times, or if the agreement allows the licensor to vary the part of the property occupied from time to time that may indicate that the licensee does not have exclusive possession.

It is essential that parties are properly advised from an early stage and the appropriate agreement is drawn up from the outset.This blog is intended to provide general information only.