Businesses can occupy property under either a lease or a licence, and the distinction is significant. In short, a lease grants an actual legal interest in land (exclusive possession for a term), whereas a licence is simply permission to occupy or use property in a way that doesn’t confer those strong property rights. Here are the differences and why it matters:
- Exclusive Possession: The hallmark of a lease is that it gives the tenant exclusive possession of the premises for the duration – meaning the tenant can keep out even the landlord (except as permitted for entry under the lease). The space is essentially yours to control during the term. A licence, however, does not grant exclusive possession. It merely allows you to use the premises for certain purposes, but the owner retains control and can typically access or even require you to move if needed. For example, if you have a licence for a desk in a co-working space, the provider might move you around, and you can’t treat that desk as “yours” in a proprietary sense.
- Interest in Land vs Personal Permission: A lease creates a property right (estate in land). This means it can often be assigned or sublet (if the contract allows) and binds third parties. It also means the tenant has security of tenure rights under Landlord and Tenant Act 1954 (unless excluded) – i.e., potentially a right to renew or compensation if not renewed. A licence is just a personal contractual permission. It does not create an interest that can bind third parties or be transferred. If the property is sold, a new owner isn’t bound to honor mere licences (unless they choose to or it was a license coupled with an interest, which is rare). Also, licences don’t give you LTA 1954 renewal rights or protection – they can typically be ended as per the contract (or sometimes at will).
- Formality: Leases, being interests in land, usually need to be created by deed if long term (over 3 years) and often involve formalities like registration (if over 7 years, must be registered at Land Registry). Licences are simple agreements, often short documents, sometimes even just terms and conditions, and don’t require those formalities. They’re often used for short-term arrangements or flexible occupancy.
- Security of Tenure and Eviction: If you have a valid lease and the term hasn’t expired, a landlord generally cannot evict you without cause (they’d need to prove a forfeiture event like non-payment and go through court). If the term ends and you have security of tenure, they must follow 1954 Act procedures to end or renew. With a licence, if the licence period or conditions allow termination, the owner can usually terminate per contract and you’d be expected to leave. If you don’t, you’d be trespassing since your permission was revoked. In practice, some owners still go to court for possession for peace of mind, but you have far less protection. Also, a licence often can be ended very quickly if needed (some are terminable on short notice or even on demand).
- Typical Uses: Leases are typical for established arrangements – e.g., renting an office, shop, etc. for years. Licences are more common for things like shared spaces or short-term usage – e.g., a pop-up shop in a mall for 3 months might be on a licence, or a market stall, or an artist renting studio space on a month-to-month flexible deal. Also, some landlords deliberately use licences to avoid granting tenants property rights.
- Beware of Sham Licences: It’s important to note that calling an agreement a “licence” doesn’t make it so if in reality it grants exclusive possession for a term at rent – that’s basically a lease by definition, regardless of the label. Courts look at substance over form. If a landlord tries to evade tenant rights by using a “licence” agreement, a court could later rule that the occupant was actually a tenant with full rights. For instance, if you have a “licence” for an office room where you have a key and the landlord can’t enter freely, and you pay monthly and it’s for 12 months – that’s likely a lease in substance. Landlords sometimes prefer licences to avoid security of tenure or the hassle of formal evictions, but they must be careful because mislabeling can backfire.
- No Security of Tenure in Licences: Because a true licence doesn’t fall under LTA 1954, you as a business have no right to renew or compensation when it ends. It ends as per agreement and that’s it. This can be fine if you only need space short-term or seasonally. But if you’re investing in a location (building clientele, installing fixtures), a mere licence is risky – you could be asked to leave and lose that investment.
- Flexibility: Licences tend to be more flexible. They might allow you or the owner to terminate on short notice (like a rolling monthly licence). That can benefit a startup that doesn’t want a long commitment or might outgrow a space. Leases commit you longer – good for stability, but less flexible if your plans change.
- Cost and Negotiation: Licences might have simpler negotiation and possibly lower upfront costs (no need for heavy legal negotiation since rights are limited). Leases often have more extensive negotiations and possibly require you to pay part of landlord’s legal fees or stamp duty if long, etc. Also, leases often require a deposit or guarantee; licences might too but often for short terms deposits are smaller.
- Examples:
- Leasing: You rent a shop for 5 years via a lease. You can lock the door; landlord can’t just put someone else in there. You likely have a right to renew after 5 years (unless opted out) or at least compensation if not renewed (if inside Act).
- Licensing: You occupy a kiosk in a shopping centre via a licence agreement. The centre management can relocate you to a different spot if needed, or end the licence with a month’s notice if they plan construction, etc., as per the agreement. You do not have estate in land, just permission to trade in that spot.
- Landlord and Tenant Act 1954 Exclusion vs Licence: With leases, landlords often exclude 1954 Act protection by having the tenant sign a waiver (statutory declaration) before the lease. This achieves a similar end (no renewal rights) as a licence would inherently have. So sometimes short leases with exclusion can function similarly to licences but still be leases in structure.
In practice, businesses should carefully consider which arrangement they are entering. Licences can be suitable for short term or very flexible occupancy needs. They’re common in coworking spaces, business incubators, or when testing a location. Leases are appropriate for committed long-term occupation where you want stronger rights and stability.
If you are offered a “licence” by a landlord for something that looks like a standard rental, be cautious. It may be fine if you also want flexibility, but ensure you’re not inadvertently giving up protections you assumed you had. Also, ensure the licence isn’t a disguised lease – because if it is, you might actually have rights (good for you perhaps) but also obligations (like you might actually be liable for business rates as an occupier even under a licence – this is something to clarify; in a serviced office licence, often the fee includes a share of rates, but legally the occupant might not be the rateable occupier).
From the landlord’s perspective, licences are often about control – e.g., easier to remove a licensee and reuse the space. From the tenant’s perspective, a licence may mean less security but possibly cheaper and more negotiable terms.
In summary, the difference boils down to property rights (lease) vs. permission (licence). When deciding which to go for, consider your business’s need for security versus flexibility. Regardless of what an agreement is called, consider the actual terms: if you’re granted a dedicated office for a year and can exclude others, you likely have a de facto lease and possibly rights accordingly. Conversely, if you only have a desk in a shared area and the provider can move you and provide services, that’s a license, easier to start and end, but you must be prepared to pack up if needed. Consult British Contracts to clarify what you’re dealing with, so you know what rights you have or lack under each form of agreement. We offer highly competitive fixed-fee reviews under our Bronze and Silver packages, as well as bespoke contract documents under our Gold and Platinum packages, providing excellent value for money.