There are different means of occupying commercial premises and it can often be difficult to understand the impact that the form of agreement can have on your rights and obligations. Two of the most popular options include licences and tenancies.
What is a licence to occupy?
A licence is a personal right to occupy a premises which avoids the occupier being in trespass by being on the premises. A licence does not offer security and can be revoked at any time. As a licence is a personal right it will not bind the purchaser of the freehold of the premises.
What is a tenancy?
A tenancy creates an interest in land unlike a licence. A tenancy will bind the purchaser of the freehold title which therefore provides security to a tenant.
How to distinguish the two?
One thing to watch out for is labelling an agreement a license when in fact the terms of the agreement suggest a lease. The courts have confirmed that they will look beyond the label given to a document and consider the substance and form of an agreement in deciding whether it is a licence or a tenancy.
There are certain terms which can indicate whether an agreement is a lease or a licence. The following terms would indicate a lease:
- Granting the party exclusive possession
- The agreement allows exclusive possession for a fixed term
- A rent is payable in exchange for the above.
The following clauses within an agreement have been held to indicate the agreement is for a licence rather than a lease:
- The occupier should not interfere with the owner’s right to possession and control of the premises
- The ability for the owner to transfer the occupier to alternative premises
- Where the occupier is only entitled to use the premises for part of the day.
Which should you choose?
Based on the above, it may seem difficult to understand why licences are still so popular given their lack of formal recognition in law and the lack of security they provide however there are many situations where a licence to occupy is beneficial to both parties. These include the following:
- Where both parties only require the premises for short term use
- As a concession stall arrangement within a store
- During the period between exchange and completion whereby one party would like to occupy the premises to undertake fitting out works
- During the period between exchange of an agreement of lease and the grant of a lease
Ultimately the form of the agreement will largely be dependent on the circumstances of the transaction. We have considered a few factors which may influence your choice and the advantages and disadvantages of each type of agreement.
Speed and complexity:
Leases are generally lengthy documents in comparison to a licence to occupy. Leases involve detailed negotiations therefore the costs involved in drafting a lease are generally more than those associated with drafting a licence.
Land Transaction Tax (LTT):
Another consideration which can often be overlooked when taking on commercial premises are the additional costs involved post completion such as land transaction tax.
When granting a lease, LTT may need to be paid. However licences are exempt interests that are outside the scope of LTT. Therefore, no LTT is payable. However, a licence coupled with an agreement for lease may trigger an LTT liability. Please note that LTT is only payable in wales and Stamp Duty Land Tax is applicable in England.
Continuation of tenancy:
If a lease isn’t contracted out of the Landlord and Tenant Act 1954 then at the end of the term the tenant is entitled to remain in the premises following the expiry of the lease. Whereas a license does not fall within the scope of the 1954 Act.
Security and control:
A lease confers a secure period of income for the landlord and a secure period of occupation for the tenant. However this also results in limited rights of access for the landlord whereas with a licence the landlord will have more control over the terms of the occupation.
Therefore the form of agreement will be a matter of negation between the parties dependent on the needs of the parties and circumstances of the transaction. Both forms of agreement still have a place in commercial property however careful drafting is required in order to avoid having the court implying what form of agreement the document was intending to be.
The information contained in this article is for information purposes only and is not intended to constitute legal advice. If you require further information our commercial team would be more than happy to assist you. Please contact us at [email protected] or call us on 029 2009 5500 to speak to one of our team.