Lease or Licence? Which one is most appropriate for my circumstances?

Introduction

Leases and licences both entitle a person (either a tenant/lessee or a licensor, depending on the agreement) to enter into and use a property, or part of a property in a certain way.  Leases and licences are used by parties across a broad range of sectors and can include (but are not limited to) retail, hospitality, manufacturing and agribusiness.

Both licences and leases ordinarily have a number of similar provisions, the lease/licence will be for a defined term and set out details of a permitted use of the premises, the licensee/tenant will pay money to the licensor/landlord and there will be provisions setting out the rights and obligations of each party to the agreement.

However there are a number of differences between the rights afforded pursuant to a licensee as compared to a lease, which need to be considered by parties entering into an arrangement for use of a property.

What should I be thinking about when seeking to enter an arrangement for use of a premises / land?

The matters you should consider when entering an arrangement for the use / occupation of land (which will determine whether the arrangement is a lease or a licence) are as follows:

Is there an intention that the tenant will have exclusive use of the property, or will the landlord or third parties also still have a right to use and access the property?

The key difference between a licence and a lease is that a lease grants exclusive possession of a premises to a tenant.  This means that a tenant under a lease may exclude all others, including potentially the landlord, from the premises.

A licence on the other hand grants non-exclusive possession of a premises to a licensee.  The licensee has a mere contractual right to enter onto and use the premises for a particular purpose.

As such, under a licence, a licensor is often entitled to enter onto the premises at will, without notice to the licensee and/or to grant a licence to other third parties to also enter onto and use the premises for a purpose (provided that use does not interfere with the licensees’ use of the premises).

Licences are often used where there is shared use of a space (i.e. toilets used by multiple tenants of a building or co-working spaces) or where exclusive use cannot be guaranteed because there is no way to effectively exclude access to the space by third parties (i.e. for a car parking space or an unfenced area which borders public space).

How flexible do the parties intend the arrangement to be?

A licence may afford more flexibility to parties, for example by providing for a shorter term arrangement, more limited obligations upon the tenant, the ability to adjust the defined area which has been licensed or may provide for early termination of the arrangement if required by one of the parties.

What is the intention for use of the property by the tenant?

The Retail Leases Act 2003 (Vic) (the Act) does not govern licence agreements (except where that licence agreement can be held to be a lease arrangement).  As such, licensees do not receive the protections afforded by the Act, even where the use of the premises by the licensee could be held to be a retail use.

Additionally, a tenant under a lease has greater protections at law (whether by operation of the Act or other legislation) against termination and re-entry, which are not available to a licensee (unless the terms of the licence provide for same).

Is there any intention to sell the property during the term of the arrangement, and if so what is the effect of the sale on the arrangement?

A lease is a proprietary right / interest in land.  If the premises is sold by the landlord during the term of a lease, that lease is automatically assigned to the purchaser of the premises upon settlement.

Because a licence is a contractual right (which is only enforceable as between the parties, and not against any third parties), it will only bind a purchaser on a sale where the purchaser of the property has agreed to a transfer or assignment of the licence.

Would a lease or a licence suit my purposes?

Your individual circumstances which include the matters set out above need to be taken into account when deciding whether a lease or a licence is most appropriate for your circumstances.  What use will be made of the property, the intentions of the parties and any obligations upon the tenant/licensee will form a part of these considerations.

A licence can be cheaper and easier to prepare, and may contain less obligations on the parties in relation to the premises, but may not be the most appropriate arrangement, particularly where there is a need to exclude third parties from the premises.  This may be important when the tenant will be carrying on a business in the premises.

The document I have is entitled “Lease”.  Does that mean I can assume it is a lease?

Even where parties uses the language of “licence” or “lease” in documenting their arrangement, you should be aware that this is not necessarily determinative of the nature of the agreement.

In a dispute, it is the substance of the agreement between the parties and their intention (i.e. the nature of the rights the parties intended the licensee/tenant to have in relation to the premises) that is relevant to a determination of whether an agreement is a lease or licence arrangement.  This is determined objectively, on the basis of both the terms of the agreement and the surrounding circumstances (which include acts by the parties).

Whether it was the intention of the parties that the tenant/licensee have exclusive possession of the premises is an important factor in this assessment. Cases which have considered this include the following:

1. Raidaich v Smith (1959) 101 CLR 209 – where the agreement between the parties was held to be lease (despite the deed using the word licence) on the basis that it could be shown that the substance and effect of the deed was to give Radaich exclusive possession of the premises.  The premises was a lock up shop in which Radaich ran a milk bar business.
2. Lewis v Bell (1985) 1 NSWLR 731 – where it was held that the arrangement between the parties (which was termed a licence) was in fact a licence arrangement.  The arrangement was held to be a right to use stables and associated facilities for the stabling of horses to run at the racecourse by the trainer, but this arrangement was a personal right which did not amount to exclusive possession.
3. Swan v Uecker [2016] VSC 313 – where the Supreme Court of Victoria held that a particular Airbnb rental arrangement amounted to a lease and was not merely a licence to occupy the property.  Again, a finding that the Airbnb tenants had exclusive possession of the apartment during their stay was a critical factor in determining the nature of the arrangement.  As a result of this, the respondents, who were themselves tenants, were found to be in breach of their lease (on the basis that subleasing was prohibited pursuant to that lease).

For this reason, it is important the parties seek advice when entering into an arrangement to allow use of a premises to a third party.  Your legal representative can ensure that the agreement most appropriately meets your needs, and that there will be no dispute as to its nature at a later time.

How can Coulter Legal assist me?

Coulter Legal can assist you in relation to the preparation or review of a licence or lease arrangement, including providing advice on what arrangement would be best for your individual circumstances.