If you are a business owner and have just found the perfect premises for your business, it is probably a very exciting time. However, finding the right space for your business will create a long list of tasks to complete and requirements to check. One of the biggest things organise is your lease agreement. But, is it a lease or licence? It is very important to know the differences between these two arrangements so that you can make the right choice for your business. This article will explore the differences 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 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:

  1. the landlord and the tenant must intend to create a legal relationship with each other;
  2. the landlord must give the tenant exclusive possession of the property; and
  3. there must be a fixed lease term with a set periodic rent.

If these elements are not present, a lease may not legally exist. If so, the rights of yourself and the landlord may be compromised. Notably, a lease should be in writing and signed by both parties.

Advantages of a Lease Agreement

The main advantage of a lease for you as a tenant is the right to exclusive possession of the property. This means that 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 you with greater security if the landlord goes bankrupt or decides to sell the property.

Disadvantages of a Lease Agreement

If you want a short term or more flexible arrangement due to impending business growth, a fixed lease may not be the best option for you. 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.

What is a Licence Agreement?

In contrast to a lease, a licence agreement is used where the:

  1. licensor and licensee have an intention to create a legal relationship; but
  2. the licensor will not provide the licensee with exclusive possession of the premises.

You may wish to enter into a licence agreement if you, the licensee, intend only to use part of the premises. Furthermore, if you only want to use the premises temporarily or intermittently, a licence agreement may be preferable.

As with a lease, it is common that a licence agreement is in writing and signed by all parties to the transaction.

Advantages of a Licence Agreement

As a licensee, a licence agreement offers you a shorter term or more flexible arrangement. This can be a positive if you are expecting to upscale or downscale your business.

Disadvantages of a Licence Agreement

A licence agreement is far less secure than a lease and, therefore, you can be evicted more easily. This can be a very difficult and frustrating process if you have spent time and money fitting out the premises to your brand.  

Further, it is common to share common areas with other businesses in licensed premises. This means that you must manage the relationships with those other businesses in addition to managing your own business.

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, contact LegalVision’s leasing lawyers on 1300 544 755 or fill out the form on this page.

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