As a business owner, finding the perfect location for your business is an exciting milestone. However, securing the ideal space comes with a list of tasks and questions. For example, is it better for you to use a lease or a licence? Understanding the differences between these two arrangements is essential to making the best decision for your business. This article will clarify the distinctions between leases and licences and explain the pros and cons of each.
What is a Lease Agreement?
A lease is a contract where you will be granted the interest and use of a piece of land or premises for a specified period of time. It allows you to have exclusive possession of the premises. By providing this exclusive possession, the landlord must allow you to have “quiet enjoyment” of the property.
A lease must have the three following legal characteristics:
- the landlord and the tenant must intend to create a legal relationship with each other;
- the landlord must give the tenant exclusive possession of the property; and
- there must be a fixed lease term with a set periodic rent.
Depending on your state or territory and your lease’s length, registration on Title will be required. Registration will provide security if other third parties try to fight for their interests on the premises. This is known as indefeasibility, meaning that your interest in the land will take priority over other unregistered instruments.
Advantages of a Lease Agreement
By having an interest in the property, the main advantage of a lease for you as a tenant is the right to exclusive possession of the property. This means a landlord cannot interfere with your business unless otherwise specified in the lease.
For example, the landlord cannot walk in every day to check on the cleanliness of the bathrooms. They will generally have to give you reasonable notice and limit inspections to reasonable times for more substantive issues. These issues might include inspecting the fittings and fixtures to determine if anything needs to be repaired.
Further, a lease can also be registered, and your interest noted on the formal title of the property at the relevant state or territory land titles office. This provides greater security if the landlord goes bankrupt or decides to sell the property. Where there is a new landlord, if your interest is registered, the new landlord must take on and honour your lease. This is called an indefeasibility of title.
Continue reading this article below the formDisadvantages of a Lease Agreement
A fixed lease may not be the best option if you want a short-term or more flexible arrangement due to business growth. Leases are often rigid and require you to make good and fix up the property upon ending the lease.
If your business is growing rapidly, you may want to consider a more casual arrangement. For example, offices in co-working spaces generally have less onerous notice requirements. Therefore, it is easier to move on when your business growth demands it.
This guide will help you to understand your options when you purchase a business with leased premises.
What is a Licence Agreement?
In contrast to a lease, a licence agreement is used where the:
- licensor and licensee have an intention to create a legal relationship; but
- the licensor will not provide the licensee with exclusive possession of the premises.
As with a lease, all parties usually sign a licence agreement in writing.
Advantages of a Licence Agreement
As a licensee, a licence agreement offers a shorter-term or more flexible arrangement. This can be a positive if you expect to upscale or downscale your business, especially for start ups with fast-changing requirements. For example, start-up businesses may wish to adopt a licence in a co-working space that has a:
- collaborative environment;
- flexible terms; and
- minimal maintenance and repair requirements.
Disadvantages of a Licence Agreement
A licence agreement is far less secure than a lease. A licence has flexible terms that allow you to exit the licence. However, this means the licensor can evict you without cause.
Further, sharing common areas with other businesses in licenced premises is typical. This means you must manage the relationships with those other businesses while running your own business.
In addition, where you would like to sublicense the premises to generate more income, it is challenging unless the express terms of the licence agreement allow it.
Key Takeaways
Whether a lease or licence agreement is better for you will depend on the:
- proposed use of the property; and
- needs of the parties.
The main benefits of a lease are that it provides you with better protection and that you will have exclusive possession of the premises. In comparison, a licence agreement can be beneficial if you require a casual relationship for only part of the property.
If you have any questions about leasing or licensing a premises, 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 at 1300 544 755 or visit our membership page.
Frequently Asked Questions
A lease provides exclusive possession of a property for a specified period, while a licence grants the right to use the property without exclusive possession.
The decision depends on your proposed use of the property and the specific needs of your business.
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