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Licence to occupy in commercial property leases

A licence to occupy is a common arrangement used to regulate a party’s occupation in a property. It can serve as a useful tool for property owners and businesses alike, but only when fully understood and used in appropriate circumstances.

What is a licence to occupy?

A licence is a personal right or permission for a party to use, or ‘occupy’, a property. More specifically, a licence to ‘occupy’ is essentially permission for one party to do something on another party’s property. It is, by its very definition, not a lease. The owner of the property is usually referred to as the ‘licensor’, and the party granted permission to use the property, referred to as the ‘licensee’.

The key features of a licence to occupy are:

  • agreements that do not benefit from security of tenure (meaning there is no statutory right for the licensor to remain in the property once the licence has come to an end);
  • rent is not controlled under statute;
  • rights of occupation are personal and cannot be passed on to any other party;
  • generally short-term arrangements (although not absolutely necessary); and
  • do not give the licensor exclusive use of the area in question.

How long can a licence to occupy be?

Generally, licences to occupy are short-term in nature. They can be used as a stopgap for businesses who need a short-term solution whilst they look for longer term premises arrangements. Alternatively, they are also used to allow a party to start occupying a premises whilst the terms of a formal lease are being negotiated and agreed.

However, a licence is a contractual arrangement between two parties and, technically, it can be for whatever length the parties agree.

What’s the difference between a lease and a licence to occupy?

Just because a document is labelled a licence, it doesn’t make it so. Case law has concluded that even if a document calls itself a licence, if it has the characteristics of a lease then it will be deemed to be a lease.

The key determining factor as to whether an arrangement is a lease, or a licence, is whether the party occupying a premises has a right of ‘exclusive use’ of that premises. Essentially, if the party occupying the premises can lock out the owner of the premises then it will generally be deemed to be a lease, rather than a licence.

Parties should be aware, therefore, that although they may intend to enter into a licence to occupy, such arrangements carry an inherent risk of being deemed a lease. The reality of the arrangement is important.

A licence to occupy can be a useful arrangement for a property owner where flexibility is required or where the property has multiple users. This may also suit a licensee, if the commercial terms meet its requirements and are reflective of the rights granted.

A prospective licensee should, however, be under no illusion that their use of the intended property is always dependent on the licensor’s continued permission, which could be withdrawn on short notice. This should be taken into account when considering investments, which depend upon the continued occupation or would be diminished if terminated. Such occupation, under a licence to occupy, is unsecure and precarious.

Licences to occupy are commonly used in the follow circumstances:

  • Serviced office space on a short-term basis
  • Between a buyer and a seller of the property in the period between exchange and completion
  • Prior to the grant of a lease when the parties are negotiating the terms of the lease, but the tenant requires early access to the premises
  • Department store concession arrangements

Understanding the difference between a lease and a licence to occupy is important because a tenant occupying premises for the purpose of its business generally has certain statutory rights, including specifically the right to remain in the premises and renew its tenancy at the end of the term. This provides the tenant with what is known as ‘security of tenure’. The landlord only has a right to object to such a renewal on very limited grounds.

If a landlord expects to be granting a licence, but in fact grants a lease with security of tenure, this could have significant consequences for its ability to use the property for its intended purposes in the future. A licence, if drawn up correctly, should avoid this risk.

As noted above, occasionally, a licence to occupy will be granted in the period between exchange and completion of an agreement for lease. Even though, ultimately, the tenant intends to complete a lease, the landlord should remain mindful of the risk of security of tenure arising (if the intention is for it to be excluded). In this scenario, the landlord’s solicitor will need to ensure that, before the agreement for lease is exchanged (and access to the premises is granted) the necessary notices will need to be served to exclude security of tenure.

Terminating a licence to occupy

There is no set formula to document the giving of notice to terminate or recording that the licence has ended. However, a well drafted licence should set out the sets required to be taken in order to terminate and these steps should be strictly followed. Ordinarily, a simple letter giving notice (and preferably acknowledged by the recipient) would be sufficient to terminate a licence to occupy. It is, however, always sensible prior to terminating to obtain specific legal advice, as the terminating party (particularly if this is the property owner) will need to ensure comply with any specific terms of the agreement and be comfortable that a tenancy arrangement has not been created.

Where a tenancy has indeed been created (perhaps because exclusive possession was indivertibly granted) if the landlord has not taken steps to exclude security of tenure provisions then the landlord will only be able to terminate if one of the limited statutory grounds arises.

Can a tenant grant a licence to occupy?

A tenant may be able to grant a licence to occupy. Whether a tenant can grant a licence to occupy is dependent upon the terms of their lease. Tenants should be aware, however, that a lease is likely to expressly prohibit any shared use of the property. Alternatively, it may be permitted, but only with the express written consent of the landlord. Conditions may be attached to such consent.

What should you look out for in your licence to occupy?

What you should look out for depends on whether you are the property owner or potential user.

Property owners who wish to avoid granting rights of tenure should look out for provisions:

  • granting exclusive possession. Generally, a tenancy is created where there is exclusive possession;
  • providing for a fixed term; or
  • reserving a rent (payment due from the licensee should be referred to as a ‘licence fee’ rather than rent).

These conditions may suggest that it is not in fact a ‘licence to occupy’, but instead a lease.

Licensees should check:

  • they can terminate the licence in line with their expectations
  • they have rights to use all those parts of the property which they require and for their required purpose.

Deposit protection and licence to occupy

There is no requirement for any deposit paid to be paid into any deposit protection scheme or otherwise secured. For this reason, a licensee should be cautious in respect of a request for a large deposit – it may face difficulties if dealing with an unscrupulous property owner or one facing financial difficulties.

Costs associated with a licence to occupy

Ordinarily costs associated a licence to occupy are lower than those expected for a lease. Generally, a licence to occupy will be a shorter and more straightforward document that does not require the same level of formalities (such as pre-contract searches or registration at the Land Registry). This does, however, very much depend upon the terms to be agreed, the reasonableness of the parties and the existence of any complexities. It will also be down to negotiation as to who bears the cost of the preparation and completion of the licence – sometimes the licensor will insist that their legal fees are paid, but in the current market it is more common that each party bears their own costs.


What next?

If you are going to enter into a licence to occupy, our commercial property solicitors can help. Call us on 0800 689 1700 or fill out the short form below with your enquiry.

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