A licence to occupy is an agreement that documents a prospect landlord’s (licensor) consent for a prospective tenant (licensee) to occupy a commercial property on a temporary basis. Here we discuss in what circumstances a licence to occupy might be used and what key terms the parties should consider.

When is a Licence used?

A licence is often used in circumstances where the parties are still negotiating the terms of the lease and therefore prior to the grant of a formal lease. It can also be useful where for example a change of use is required, and the grant of permission is awaited from the Local Authority. The prospective tenant might be permitted to occupy the property temporarily until the planning permission is granted and this can therefore assist where the tenant’s previous lease has come to an end. The licence allows the prospective tenant to have early access to the property until the final lease is agreed.

What terms are included in a Licence to occupy?

The rights of occupation granted under the licence are personal to the prospective tenant and cannot be passed on to any other party. There are a number of competing commercial factors that each party will need to consider before agreeing a licence. A few of those factors include:

1. The extent of the property

It is important that both parties are clear on what parts of the property the prospective tenant will be permitted to use during the Licence period.

The prospective landlord will also need to carefully consider whether exclusive possession is being granted, as if the prospective tenant tries to make such a claim then it’s occupation could be deemed as being protected by the security of tenure provisions afforded to business tenants under statute. This in turn can cause some serious issues for the prospective landlord as this means that the prospective tenant obtains further rights to stay in the property.

2. The use of the property

The licence will stipulate what the tenant is able to use the property for. For example, if planning permission is awaited for a change of use, then the tenant may only be granted permission to store their items and perhaps undertake fit-outs works (any works undertaken to the property would usually be documented separately within a Licence for Alterations).

3. The length of the term and termination

Generally occupation granted is on a short-term basis. The Licence will ordinarily include specific conditions for termination, for example the parties might agree that the Licence will come to an end once the formal Lease has been completed or when formal Planning Permission has been granted.

It is important for the tenant to be aware that the Licence often also provides that the licensor can withdraw their consent on short notice so a licence therefore offers no real security. Moreover, if the licensor disposes of its interest in the property, the licence will cease.

As such, tenants should be mindful of this when considering investments that depend upon the continued occupation of the property or would otherwise be diminished if terminated.

A well-drafted licence will set out the steps required to be taken to terminate the Licence and these steps should be strictly followed.

4. Rental payments

The parties will agree the amount of the rent and when it is to be paid for example on 1st of every month.

Conclusion

A licence can be a useful commercial tool for business owners in documenting temporary arrangements for occupying a property and can often provide some added assurance to both parties. It is important that the competing commercial interests are balanced, and the document addresses each party’s specific needs.

Our Commercial Property Team have a wealth of experience with all areas of commercial property matters, so if you have any queries or require any assistance please do not hesitate to get in touch. We would be more than happy to help you with your commercial needs.