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To Lease or Licence, that is the question

24th July 2017

Categories: Latest News

As TDA's Estate Manager, I oversee the management of over 600 assets across Torbay Council's Let Estate. In the process, we grant a combination of different rental agreements depending upon factors such as the type of occupation, whether a tenant has the benefit of protection under the Landlord and Tenant Act 1954 and has exclusive possession of a property.

A question that I am often asked is; “What’s the difference between a Lease and a Licence?”

There is a distinct difference, and both can be used when granting commercial property rental agreements.

A lease is usually entered into for a fixed period of time. Clearly the duration of any lease will vary and is dependent upon many factors.  In the past, the lease length was typically anything between 15 and 25 years. Research now suggests the average business lease is now down to as low as 8 years. 

The main advantage of a longer lease is to offer long term stability. The additional protection of the Landlord & Tenant Act, introduced to provide statutory rights of renewal at the end of a lease, gives the certainty a tenant needs to invest in a property.

A landlord, with the Council being no different, will often prefer to retain more flexibility in the lease terms entered into by granting leases with protection of the Landlord & Tenant Act specifically excluded.  Alternatively, the use of break options will give either the landlord or tenant an option to break the lease at some point during the fixed term of the tenancy.  This can be inserted into a lease and can be a single or multiple options at pre-determined times. 

There are usually set terms of how and when a break option can be activated on a certain period of notice, typically three to six months.  The risk for any break option is there is usually conditions attached to a break option for example no rent arrears.  There is also the need to serve notices in a precise way, the failure to do so can result in a break option not being effective, with the lease continuing at considerable cost.

An alternative to a lease is the granting of a licence. 

This is particularly so where no exclusive possession is granted.  A licence is an effective solution when granting temporary rights of access.  They will generally cover shorter periods of time, typically up to 6 months.  A licence will also give both the landlord and tenant the right to terminate the agreement on much shorter periods of notice.

With any licence there will be no right to renew the licence once it has expired.  The obvious disadvantage is there is no long term security, which can have an impact on a tenant who is unable to plan ahead.  For the landlord this can affect the value of the property in the short-term as there is no security of income.

Being able to utilise all options is clearly an advantage to an asset manager.  A tenant’s need for protection has, in my opinion, changed in many cases in recent years. There is less of an importance for protection currently. However, this trend may change if the commercial property market becomes less strong.  I think landlords will be more motivated to deal with the best covenants even if this means granting leases inside the Act.

TDA is able to provide advice on all types of tenancy agreements.  Paul Palmer, TDA Estates Manager, can be contacted on paul.palmer@tedcltd.com

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