A licence to occupy can offer commercial landlords and tenants a flexible way to allow business premises to be used without entering into a conventional lease. It is commonly used for short term occupation, shared workspace, temporary arrangements and situations where a landlord wants to retain greater control over how premises are occupied.
For both landlords and occupiers, it is important to understand the legal effect of the arrangement. A licence generally gives the occupier permission to use premises without granting a legal interest in the property. That distinction can impact the rights available to the occupier, the landlord’s ability to recover possession and whether statutory protections associated with a commercial tenancy apply.
In this guide our commercial property solicitors explain how licences to occupy work in commercial property, how they differ from leases and the key issues landlords and tenants should consider before entering into one.
Here we’ll consider:
- What’s the difference between a commercial lease and a licence to occupy?
- What are the benefits of using a licence to occupy?
- What are the disadvantages of using a licence to occupy?
- What should you look out for in your licence to occupy?
- Can a commercial tenant grant a licence to occupy?
- How long can a licence to occupy last?
- How do you terminate a licence to occupy?
- Summary
What’s the difference between a commercial lease and a licence to occupy?
A lease and a licence can appear similar because both allow an occupier to use commercial premises, often in return for payment. Legally, they are different arrangements.
A lease grants the tenant a legal interest in the property for an agreed period. A licence generally provides only personal permission to use the premises. This means a licensee will usually have fewer rights in relation to the property than a tenant under a lease.
One of the most important factors in distinguishing a lease from a licence is exclusive possession. Broadly, exclusive possession means having the right to exclude others, including the landlord, from the premises, subject to any rights of entry reserved in the agreement.
Where an occupier is granted exclusive possession of identifiable premises for a term, the arrangement may have the characteristics of a lease even if the document itself is called a licence.
The courts can look beyond the title of the agreement and consider the substance of the arrangement. Commercial landlords should avoid using a licence simply because they want to avoid creating a tenancy if the practical arrangement is more consistent with a lease.
The distinction is particularly important because certain business tenancies may benefit from security of tenure under the Landlord and Tenant Act 1954. In broad terms, this can give a qualifying business tenant rights to remain in occupation after the contractual term expires and to request a new tenancy, subject to the statutory rules.
A genuine licence to occupy does not usually provide the same protection, which is one reason why both landlords and occupiers need to be clear about the arrangement they are creating.
What are the benefits of using a licence to occupy?
The main attraction of a licence to occupy is flexibility. Licences are often used where the parties do not want the longer term commitment or more extensive rights that typically accompany a commercial lease.
For landlords, a licence can provide a practical way to generate income from vacant or underused space while retaining greater control over the premises. It can also be useful where the landlord wants to accommodate several occupiers within the same building or does not want to grant exclusive possession of a particular area.
This makes licences particularly suitable for shared office environments, flexible workspace, temporary concessions and other arrangements where the property is intended to remain under the landlord’s overall control.
For occupiers, a licence can be useful where property requirements are temporary or uncertain. A business may need additional office space for a limited period, want to test a new location or require temporary accommodation while longer term premises are being prepared.
Licences can also be useful where occupation needs to begin quickly. Although appropriate legal documentation should still be put in place, a straightforward licence may be easier to negotiate than a detailed commercial lease.
Termination arrangements can also provide flexibility. Depending on the terms agreed, either party may be able to bring the arrangement to an end on relatively short notice, which can suit both landlords and occupiers where the future use of the premises is uncertain.
What are the disadvantages of using a licence to occupy?
The same flexibility that makes a licence attractive can also create disadvantages for both parties. For the occupier, the most significant issue is usually the lack of long term security. A licence may be capable of termination on relatively short notice and the occupier will not normally have the same rights as a tenant under a commercial lease.
This may make a licence unsuitable where the occupier expects to invest heavily in the premises. For example, a business may intend to install expensive equipment, carry out fitting out works or rely heavily on a particular location for customers and staff.
If the occupier could be required to leave relatively quickly, it should consider whether that investment is commercially sensible and whether a lease would provide greater certainty.
The arrangement can also offer less control. A licensee may be required to share parts of the property with other occupiers or accept that the landlord retains substantial rights of access and management. For landlords, one of the main risks is accidentally creating a lease. Simply describing an arrangement as a licence does not determine its legal status.
If the occupier is given rights that amount in substance to a tenancy, the landlord could find that the occupier has greater legal rights than expected. This can create difficulties when the landlord later wants to recover possession of the premises.
For that reason, the written terms and the parties’ conduct should be consistent with the intended licensing arrangement throughout the period of occupation.
What should you look out for in your licence to occupy?
A well drafted licence should clearly record what each party is entitled and required to do. Before entering into the agreement, landlords and occupiers should ensure that the written terms reflect how the premises will actually be used.
One of the first points to consider is the area the occupier is permitted to use. The licence should identify the relevant space and explain whether the occupier has access to shared areas such as entrances, kitchens, toilets, meeting rooms, car parks or storage facilities.
The agreement should also specify the permitted use. The occupier should check that its intended activities are allowed, while the landlord should ensure that the proposed use is compatible with the building, any superior lease and any relevant planning or regulatory requirements. Where a proposed activity involves a different planning use, see our guide to obtaining planning permission for change of use.
The licence fee and any additional payments should be clearly set out. These might include contributions towards electricity, heating, internet access, cleaning, security, insurance or other services.
Access rights are another important issue. The licence may expressly allow the landlord to enter the premises or require the occupier to share space with others. These provisions may be important in supporting the intended licensing arrangement, but they should also reflect the practical reality.
Both parties should also check responsibility for repairs and damage. The agreement should state whether the occupier must keep the space in a particular condition and whether it is responsible for repairing any damage it causes.
Where alterations or fitting out works are proposed, the licence should make clear whether these are permitted and whether the occupier must remove them or reinstate the premises when occupation ends.
Insurance requirements should also be considered. The landlord may insure the building, while the occupier may be required to insure its own equipment, stock and business activities.
Finally, both parties should review the termination provisions carefully. They should understand how much notice must be given, when immediate termination may be possible and what obligations apply when the occupier leaves.
Can a commercial tenant grant a licence to occupy?
A commercial tenant may want to allow another business to use part of its premises. This could arise where the tenant has excess office space, operates within a group of companies or wants to share accommodation with another occupier. Whether the tenant can grant a licence will depend on the terms of its own lease.
Commercial leases commonly regulate sharing occupation, subletting and allowing third parties into possession. The lease may prohibit these arrangements entirely, allow them only in specified circumstances or require the landlord’s prior written consent. A tenant should review its lease before granting another business any right to occupy the premises.
The tenant should also consider whether the proposed arrangement will genuinely be a licence. If the third party is given exclusive possession of a clearly defined part of the property, the arrangement could potentially amount to a sublease rather than a licence.
This could put the tenant in breach of its own lease if the necessary landlord consent has not been obtained. It could also create rights in favour of the third party that the tenant did not intend to grant. Landlords reviewing a request from a tenant to share occupation should consider both the wording of the headlease and the practical nature of the proposed arrangement.
How long can a licence to occupy last?
There is no standard duration that applies to every commercial licence to occupy. The parties can agree an appropriate period depending on their circumstances and the purpose of the occupation.
Many licences are relatively short because they are designed to provide temporary or flexible occupation. For example, a licence might run for several weeks or months while a tenant prepares to move into permanent premises or while a landlord decides on a longer term use for the property. Others may continue for longer where the arrangement remains suitable for both parties.
A licence can be granted for a fixed period, such as six months, or it may continue until one party terminates it by giving the notice specified in the agreement.
There is no automatic rule that an arrangement becomes a lease simply because it lasts for a particular amount of time. Longer arrangements should be reviewed carefully to ensure the way the property is being occupied remains consistent with the intended legal relationship.
For landlords, this means considering whether the occupier is continuing to use the premises in the manner contemplated by the licence. For occupiers, it means considering whether a licence remains suitable if the premises have become central to the business.
Where the occupier requires long term certainty, substantial control over the premises and greater protection against having to relocate at short notice, a commercial lease may be more appropriate.
How do you terminate a licence to occupy?
The licence agreement should explain how and when the arrangement can be terminated. A fixed term licence might end automatically on an agreed expiry date. Alternatively, the agreement may permit the landlord, the occupier or both parties to terminate earlier by giving written notice.
The required notice period will depend on the contract. It may be relatively short where flexibility is important, or the parties may agree a longer period to give the occupier sufficient time to find alternative premises.
There may also be circumstances in which the landlord can terminate the licence immediately. Examples could include non payment of the licence fee, serious breaches of the agreement, insolvency or use of the premises for an unauthorised purpose.
Both parties should follow any contractual termination procedure carefully. The agreement may specify how notice must be served, where it must be sent and when it will be treated as received.
The licence should also address what happens when the occupation ends. The occupier may be required to remove its belongings, return keys and access cards, repair damage and leave the premises in an agreed condition.
Landlords should be particularly cautious where there is any doubt about whether the arrangement is genuinely a licence. If the occupation may instead amount to a tenancy, the landlord should obtain legal advice before taking steps to recover possession. Where the arrangement is in fact a lease, different rules may apply; see our guide to ending a commercial lease.
Summary
With proper legal advice a licence to occupy can be a useful tool to document short term occupancy arrangements. They should however be used with extreme caution by property owners to ensure that they have not inadvertently granted a lease with security of tenure protection. A commercial property solicitor can help to ensure that your property interests are adequately protected.
