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Types of agreements

There are two types of commercial property agreements: a licence, which is a shorter, flexible agreement; and a lease, which is generally longer and less flexible. Whilst a lease is a legal entity that provides the occupier with a ‘tenancy’ and may confer security of tenure, a licence is simply the contractual right to occupy a space for a period of time and if worded correctly should not confer security of tenure.

Licence

A licence is a flexible, short term agreement, often between six months and two years. A licence would be issued to an occupier who does not have exclusive access to the space, for example where you are letting out a couple of desks in your office, or in managed workspace where tenants can be moved about if necessary. The terms of this type of agreement are generally ‘easy in, easy out’, requiring relatively short notice to terminate by either landlord or occupier (often a month).

Take a look at this template licence. It was written with support from Bates Wells Braithwaite, and includes a few tips and explanations to make things clear. However, if you use this, please bear in mind that this is a template, and you should always take into consideration the specific circumstances in which you are looking to let out space. You should also have any legal agreements checked by a qualified solicitor.

You can download the document here:


Lease

A lease is a less flexible agreement, typically three to five years in length, although it can be much longer. You would issue a lease where tenants have exclusive use of a space. A lease is a significant legal entity that provides the occupier with a ‘tenancy’ and unless agreed otherwise with your tenants (via a standard legal process), gives them ‘security of tenure’ under the Landlord and Tenant Act of 1954. This means that they have the right to renew the lease on essentially the same terms when it expires, although as the landlord you have the right to increase the rent to reflect the market (if you can prove that the market has risen through examples of other lettings).

NB.
a lease doesn’t have to be in writing for it to qualify under the Landlord and Tenant Act and even if the parties fail to sign their agreement, or it has expired, your tenants may still have security of tenure.

Whilst a lease is a legal entity that provides the occupier with a ‘tenancy’ and may confer security of tenure, a licence is simply the contractual right to occupy a space for a period of time and if worded correctly should not infer security of tenure.

It is therefore vital if you are looking to grant a licence that it is worded correctly. Naming an agreement a ‘licence’ is irrelevant if the content of the agreement includes the hallmarks of a lease. As a general rule the main determining factor of whether an agreement is a lease or a licence is depends on a number of factors:
  • whether the occupier has exclusive use of a space
  • the intention of the parties
  • right of re-entry
  • the use of the terms ‘rent’ or ‘licence fee’.

The Landlord and Tenant Act 1954, 'security of tenure' and 'contracting out'

Under the Landlord and Tenant Act 1954, business tenancies have ‘security of tenure’. This provides a certain amount of protection to the tenant to prevent him being evicted at the end of the lease and means that except under certain circumstances, the tenant has the right to renew the lease when it expires. The landlord has the right to charge a market rent on the new lease, but most other terms should stay generally the same.

A landlord may not want to give the tenant the benefit of security of tenure and, where the tenant agrees, the parties are able to ‘contract out’ of the Landlord and Tenant Act 1954 and thereby forfeit the tenant’s right to ‘security of tenure’ and to renew the lease. To do this the landlord is required to serve a standard form of notice known as a ‘warning notice’. The tenant then agrees by signing a declaration confirming that he has received and accepts the consequences of the notice. The tenant's declaration must be signed before the lease is completed and the lease itself must make reference to the fact that the parties have agreed to ’contract out’ of the Act.

This process should always be dealt with by your solicitor as failure to follow the correct legal procedure can result in the tenant acquiring security of tenure under the Act.