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Much like a lease, a licence agreement allows a landlord to permit another party to occupy their property for a specific purpose and for a set period of time. However, there are key differences between a lease and a licence agreement. In certain circumstances, a licence will be more appropriate than a lease. This article will set out the key: 

  • distinctions between licences and leases; and
  • provisions and purposes of a licence.

Lease or Licence Agreement?

As set out below, the two key differences between leases and licences relate to:

Exclusivity

The right to exclusive possession can only be granted by a lease, not a licence. This is the right for a party to exclusively use and occupy the premises. A common way to determine this is whether the area that is being occupied has physical boundaries (e.g. four walls). If this is the case, you will usually need a lease. On the other hand, if the area has no boundaries (e.g. the middle of a shopping centre), you will usually need a licence.

Proprietary Interest

A lease gives the tenant rights to the property, whereas a licence is only an agreement with the landlord to use the space. This means a tenant under a lease will receive specific rights and greater security than a licensee under a licence.  

For example, a tenant may assign a lease to somebody else, whereas a licensee cannot transfer a licence. 

Key Provisions of a Licence Agreement

Although the terms of licence agreements vary, both parties will need to agree on the:

  • specific licensed area;
  • term; and 
  • fee for the licence.

Licensed Area

The licensed area must be distinguished clearly, as licences are usually given for areas that are not clearly defined by a boundary. One benefit of a licence is that, since they are more flexible than leases, the licensed area can be expanded or reduced easily if both parties agree.

Term

The period during which the licensee is permitted to use the licensed area is important to clearly set out. While leases are usually long-term, a licence is suitable for a short term arrangement (e.g. less than 6 months).

Licence Fee

Most licences will require the licensee to pay a fee in return for use of the licensed area.

When Should I Use a Licence Agreement?

Whether a licence agreement might work for you will depend on: 

  • the specific deal between the parties; and 
  • factors such as the business and the location.

However, a few common circumstances are usually governed by a licence agreement.

For example, a licence may be the best option for:

  • franchises (franchisors frequently licence out premises to franchisees to hold the lease under the franchisor’s legal entity);
  • pop up shops (stores that ‘pop up’ for a short time, particularly in the common areas of a shopping centre);
  • shared premises (where premises are shared between many, such as rooms in a medical clinic); 
  • pre-lease commencement period (where a tenant has a right to enter and use the premises prior to the commencement of a lease; for example, to carry out fitout work to the premises);
  • co-working spaces (where multiple businesses conduct their work in the same premises); and
  • car parking spaces.

Key Takeaways

A licence agreement can be a convenient way for a landlord to allow another party to occupy its land under a more flexible arrangement. There are many circumstances under which a licence may be more suitable than entering into a lease. If you are considering entering into a licence agreement, contact LegalVision’s leasing lawyers on 1300 544 755 or fill out the form on this page.

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