Sometimes legal jargon can be confusing.

Prospective tenants of commercial premises simply want to move in and start their business. More often than not, lawyers derail these plans by spending weeks arguing over whether a lease or licence agreement should apply to the premises.

But what is the difference between a lease and licence? And more importantly, why is it important? Below, we explain some key differences you should understand before signing.

What is a Lease?

A lease must have the following three characteristics:

  1. Parties to the Lease (Landlord and Tenant) must have an intention 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 three elements are not present, a lease may not be in existence and the rights of both the Landlord and Tenant may be compromised. Notably, a lease is typically in writing and signed by both parties.

What is a Licence Agreement?

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

  1. Parties to the Licence Agreement (Licensor and Licensee) have an intention to create a legal relationship; but
  2. The Licensor will not provide the licensee with exclusive possession.

A licence agreement is common when the Licensee uses only part of the property or has only temporary or intermittent use of the property. As with a lease, it is common that a licence agreement is in writing and signed by all parties to the transaction.

Which is Better?

The appropriate document for any given tenant will depend on multiple factors including:

  • The proposed use of the property; and
  • The needs of the parties.

In some cases, the principal benefit of a lease is that it can be registered against the property’s title, creating indefeasibility of title. This means that if the Landlord sells the property, the Tenant’s rights are protected.

Further, if the property is a retail lease and covered by the Retail Leases legislation (which varies between states and territories in Australia), the legislation can offer protection to the Tenant.

However, in other circumstances, if both parties require a casual relationship for only part of the property, a licence agreement usually better suits the parties.

Key Takeaways

If you are confused about leasing and/or licensing and what you need, get in touch with our leasing lawyers. We know that each transaction is unique meaning tailored legal advice, and a lawyer that speaks in plain English is important. Let us know on 1300 544 755.

Emma Heuston
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