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Licence or Tenancy? Which One Should you Choose?

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This article has been submitted by Greenaway Scott

When it comes to renting a commercial property, choosing the right type of legal occupancy to suit your needs can be complex.

Do you need a licence to occupy? Or a tenancy? And how could your choice ultimately impact your rights and obligations in the property?

Here Aimee Thomas, a solicitor in the commercial property team at Greenaway Scott, offers her expert advice on unlocking the secrets to rental success.

What is a licence to occupy?

A licence to occupy is a personal right that provides the licensee, the person renting or occupying the land, to use the property for an authorised purpose after gaining permission from the owner. Any act approved by the owner on their land is then not treated as an act of trespass.

What is a tenancy?

In contrast a tenancy provides the licensee with the right to exclusively occupy the land for an agreed period of time, usually in exchange for rent, as part of a lease agreement.

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.

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 lengthier documents than a licence to occupy, involving detailed negotiations therefore the costs involved in drafting a lease are generally more.

Land Transaction Tax (LTT): 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.

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.

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.