A lease and licence agreement both allow a tenant (lessee) or licensee to use and occupy property (premises). However, there are several key differences between the two rights to occupy premises. It is crucial for parties to consider the differences between a lease and licence agreement before proceeding with any transactions involving real property. This article explains the differences between a lease and licence agreement.
This guide will help you to understand your options when you purchase a business with leased premises.
Exclusive Possession
A fundamental difference between a lease and licence agreement is that only a lease can grant the right of exclusive possession to land or premises. This is where the tenant has permission to exclusively use and occupy the premises. They also have the right to exclude others from the premises (including the landlord).
For a tenant to exercise such a right, the premises must be clearly defined, enclosed and capable of being locked. The premises may include a:
- whole building;
- floor of a building;
- shop in a shopping centre;
- professional suite; or
- room in a medical centre.
If other parties share the premises, it is not possible to grant a right to exclusive possession. Instead, a licence agreement may be more appropriate. For example, premises with a licence agreement may include co-working spaces, hairdressing salons where hairdressers rent a chair to run their own business, car-parking spaces or outdoor eating areas.
Proprietary Interest or Contractual Interest
A lease is a grant of a proprietary interest in land from a lessor to the lessee. Therefore, the lessee gains an absolute interest in the land (the right to legally possess and receive benefits from the land). If the ownership of the land changes during the duration of the lease, the new owner must honour the lease. The lease must be registered or protected by relevant indefeasibility of title rights in the relevant state or territory legislation.
On the other hand, a licence agreement is more personal as it is between the licensor and licensee. While a lease is capable of registration with the Land Titles Office in the state or territory of the premises, a license agreement is not. Therefore, a lessee has a greater level of security in comparison to a licensee under a licence agreement.
Continue reading this article below the formFlexibility
While a licence agreement is less secure for a licensee, it is more flexible arrangement than a lease. This is because it can be terminated early with written notice. Further, adjustments can be made to the area of the premises by varying the agreement. In contrast, if you wanted to change the premises covered by a lease, you would have to surrender your current lease and enter into a new one.
Flexibility may be desirable for a licensee with changing needs. Those changing needs may include requiring:
- early termination; or
- more or less space throughout the term.
Retail Lease Legislation
In New South Wales, the Retail Leases Act 1994 (NSW) covers both leases and licence agreements. However, in Victoria, the Retail Leases Act 2003 (VIC) only applies to leases or sub-leases. Whether retail lease legislation covers licence agreements depends on how it defines a lease.
It is beneficial for legislation to cover both a lessee and licensee because it provides certainty and fairness. Further, the legislation sets out mechanisms for resolving disputes.
Key Takeaways
Although a lease and licence agreement seem similar, there are key differences between the two. It is vital to be aware of whether your agreement is a lease. The answer will depend on:
- whether you have exclusive possession of the premises;
- whether you have a proprietary interest or a contractual interest;
- the flexibility of the arrangement; and
- whether retail lease legislation covers your arrangement.
If you need assistance with entering into a lease or licence agreement or determining which is best for you, our experienced leasing lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
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