What Are the Key Differences Between a Lease and Licence Agreement?

Summary

• A lease grants exclusive possession of a premises, while a licence permits use without exclusive possession — the distinction affects legal rights and obligations significantly.
• Businesses should ensure the agreement type reflects the actual arrangement, as courts may recharacterise documents based on the true nature of the relationship.
• Key terms such as duration, payment, permitted use, and termination rights differ considerably between leases and licences and must be clearly defined.
• This article is a plain-English guide for Australian business owners on the legal differences between lease and licence agreements, prepared by LegalVision, a commercial law firm.
• LegalVision specialises in advising clients on commercial leasing and licence arrangements.

Tips for Businesses

Review whether your agreement reflects exclusive possession or shared access — this determines whether it is a lease or licence. Ensure key terms, including duration, fees, and termination rights, are clearly drafted. Misclassifying an arrangement can expose your business to unintended legal obligations under state tenancy legislation.

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On this page

• Exclusive Possession
• Proprietary Interest or Contractual Interest
• Flexibility
• Retail Lease Legislation
• Key Takeaways
• Frequently Asked Questions

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.

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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.

Flexibility

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.

LegalVision provides ongoing legal support for businesses through our fixed-fee legal membership. Our experienced leasing lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 1300 544 755 or visit our membership page.

Frequently Asked Questions