Commercial premises licences vs commercial leases

Insight

Commercial premises licences vs commercial leases

It is a common misconception that commercial premises licences provide greater flexibility for the owner, but less legal protection for the occupier, compared to commercial leases.

The reality of the situation is, however, that it can, in fact, be the exact reverse. This is because a licence may attract the protection of the Landlord and Tenant Act 1954, providing an occupier of commercial premises greater legal protection than would otherwise be the case.

This article explores a key issue that owners should carefully consider when granting a licence to an occupier of commercial premises.

Licence or lease?

Whether a particular occupancy arrangement constitutes a licence or a lease, will depend on the particular circumstances at hand. However, a key factor to take into consideration is whether the occupier has exclusive possession of the commercial premises in question, or is sharing the premises with any other person.

Key point

It is important to note that if exclusive possession is granted, licences in excess of six months’ duration, may be construed as commercial leases. This then allows the occupier to benefit from the protection of the Landlord and Tenant Act 1954 under the terms of the licence agreement document. This may even be the case if the licence agreement document is entitled ‘licence’ and describes itself as a licence throughout.

The protection provided by the Landlord and Tenant Act 1954

The occupier benefits from ‘security of tenure’, which means that the occupier has the right to remain in the premises after the agreement expires upon the terms previously agreed until either the occupier or the owner bring this arrangement to an end. The owner can only bring the arrangement to an end under limited circumstances prescribed by the 1954 Act;
The occupier will have the right to request a renewal of the occupation arrangement upon similar terms; and
The occupier can, in certain circumstances, claim financial compensation from the owner if the occupancy arrangement is not renewed.

Implications

If the occupancy arrangement is construed as a lease and not a licence, it may be difficult for the owner to bring that lease to an end due to the Landlord and Tenant Act 1954. This can also be time-consuming and rather costly, usually requiring the advice of both a commercial property solicitor and a chartered surveyor.

The owner’s ability to freely deal with the premises will be severely reduced: something that the owner will no doubt have sought to avoid by the grant of the licence arrangement in the first place.

It is crucial to seek legal advice at an early stage with any commercial occupancy arrangement so that terms can be properly negotiated and all documentation carefully drafted.

Avoid the pitfalls of commercial premises licences