Lease or licence: know the difference

We are regularly asked the following questions:

• Does our company need a lease or will a licence suffice?
• We have excess space. Should our company sublet it or grant an occupancy licence to a third party?

Answering these questions requires an understanding of the key characteristics of a lease and what distinguishes a lease from a licence. It also requires an appreciation of some associated practicalities.

• Lease - A lease arises when a landlord grants a tenant a legal right to exclusive possession of premises for a specified period of time in return for the payment of rent.
• Licence - A licence arises when a licensor grants a licensee a contractual right to occupy premises in return for the payment of a licence fee. In law, a licensee is not entitled to exclusive possession of the premises.
• Sublease - A sublease is the creation of a lease out of a lease. The tenant grants to a subtenant exclusive possession of the whole or part of the leased premises for a term that expires before expiry of the head lease.
• Sublicence - A sublicence is a contractual arrangement under which the sublicensee is given the right to use the whole or part of the premises occupied by the sublicensor. The sublicensee is not entitled to exclusive possession of the premises.

Fundamental differences between a lease and a licence

The subject matter of a lease or licence is much the same – both involve a right to use premises in a certain way. However, there are key legal differences between a lease and licence that should be considered when taking a lease or a licence or granting a sublease or sublicence. In particular, a lease grants an interest in land which gives a tenant exclusive possession and security of tenure. A licence is a more flexible arrangement and does not afford the same security of tenure as a lease.

The fundamental characteristics of a lease that distinguish it from a licence are:

• a tenant has the right to exclude all others from the leased premises, rather than a mere contractual right to enter and use the premises for a particular purpose;  
• a lease creates an interest in land, rather than a personal contractual right; and
• a lease runs with the land. If ownership of the land changes, then the new owner must take the land subject to the lease. This is not the case with a licence and if ownership of the land changes, then the licensee does not have any rights against the new owner of the land unless the licence is transferred by agreement between the old owner, the new owner and the licensee.

If a tenant defaults under its lease it does not necessarily follow that the lease will be terminated.  A tenant has certain statutory rights to request a Court to reinstate its lease, despite the landlord having terminated it in consequence of the tenant’s default. Courts will generally provide relief for tenants who are able to remedy the default in order to keep the lease on foot, for example, by paying any outstanding rent. These protections are not available to a licensee of premises.

When to grant or take a licence

If you are taking occupation of premises it is always best to try to obtain a lease. However, a lease may not be commercially feasible because, for example, the premises are going to be shared with others and exclusive possession is therefore not practical. Other examples where taking a licence may be satisfactory or the only option available to you are:

1. When the premises are not enclosed. Licences are typically granted for premises that are not enclosed, such as car parking spaces or open/unfenced storage areas. The reason for this is to avoid the risk of leasing the premises and then not being able to guarantee exclusive possession to a tenant.
2. When a flexible arrangement is desirable. A licence is practical if a licensee only requires temporary accommodation or only requires a short-term arrangement and security of tenure of the premises itself is not crucial for the licensee. 
3. When certainty of location is impractical because of changing circumstances. A lease is for a defined premises for a set period of time. Any adjustment to the area of the leased premises will require the surrender of the lease and the grant of a new lease. However, if premises are held under licence, it is easy to change the location or increase or decrease the licensed area by way of a simple variation to the terms of the licence agreement.

When to insist on being granted a lease

Taking a lease is preferable to taking a licence in the following circumstances:

1. When exclusive possession is important. If you are operating a business, having possession of the premises to the exclusion of third parties is usually a top priority.
2. When security of tenure is important. A lessee’s occupancy rights are not affected by a change in ownership of the leased premises.

Dealing with excess space

Circumstances where you may offer a sublicence rather than a sublease include:

• your landlord will not allow subletting but will allow sublicensing
• the term of occupancy is going to be very short
• the space is not enclosed
• the space, or part of it (such as a reception area) will be shared
• the occupier of your excess space will have changing needs – requiring the use of more or less space from time to time.

We would be happy to advise you in more detail if you have any enquiries in relation to the above.