Understanding the difference between a lease and a licence in property is important when considering what type of arrangement is best for you and your business. Whilst both allow another party to operate from a premises, there are key differences between the two. If you're thinking about creating or being bound by a lease or licence, here are a few things you need to know.
What is a lease?
A lease is a formal contract between an owner of a property (the landlord) and the occupier of the property (the tenant) which details the specific obligations of each party in the arrangement. A lease outlines the key terms of the occupation of the premises such as the rent amount and length of occupancy, along with the responsibilities of each party to keep the premises in working order.
There are three elements which need to be satisfied in order for it to be considered a lease:
- The landlord and the tenant must have a mutual intention to enter into a legal relationship;
- The tenant must have exclusive possession of the property; and,
- There must be a fixed term of occupation with a fixed rent/rent review process.
What is a licence agreement?
A licence agreement is a contractual agreement between a licensor and licensee commonly used when the licensee uses only a specific part of the property or has temporary access to the licensor's property.
There are two elements which need to be satisfied in order for it to be considered a licence agreement:
- The parties have a mutual intention to enter into a legal relationship; and,
- The licensee doesn't have exclusive possession of the property.
Pros and cons of a lease
The key advantage of a lease is that it offers tenants far greater rights and protections. For example, if the landlord decides to sell the premises, the tenant's rights are protected. A lease also offers security of tenure for the tenant through an option period. In addition, tenants may also be protected under legislation, for example, if it is a retail lease, the Retail Leases Act will provide extra protections. However, under a lease, the tenant is obligated to restore the premises to its original state once the lease has expired.
Pros and cons of a licence
If the licensee only requires access to part of a property on more casual terms, a licence is far more beneficial and simple to operate. A licence is also much easier to control if you are a licensor due to less onerous obligations placed on each party. However, a licence agreement offers far less protection for the licensee compared to a lease since the licensee doesn't have a legal interest in the property.
Which is best for you?
Deciding whether to enter into a lease arrangement or a licence agreement can be a tricky task If a tenant only needs access to a property on more flexible terms and/or only part of the property, a licence is far more favourable. However, if a tenant requires exclusive occupation of a property along with more concrete protections, a lease is the best option. A lease also includes more rights and obligations, and is usually the more common arrangement in a property occupancy arrangement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
