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A lease or a licence? Knowing the difference and why it's important

Newsletter Article 18 March 2015

Cleaners, security, catering and cafes are examples of businesses that may operate within your business premises. When your business, as the owner or occupier of premises, allows another business to operate on its property it is important that the nature of the occupancy be appropriate.

There are two forms of occupancy to be considered: a lease (or sub-lease) or a licence. In granting a right to use your property to another, you should be aware of the difference between the two and the legal rights attached to each in order to choose the most appropriate form.

As an aside, please note, if you are a tenant wishing to grant a sub-lease or licence over all or part of your premises, you will need head landlord consent to do so and should check the terms of your head lease prior to taking such action.

In the absence of a document setting out the parties’ intentions or where the document is unclear or uncertain, if the relationship deteriorates it can be difficult to determine whether an arrangement is that of a lease or a licence.

The fundamental aspect which distinguishes a lease from a licence is exclusive possession, amounting to an interest in land, as distinct from a personal permission to enter and use the property for some stipulated purpose. This interest in land is called a ‘proprietary right’ and confers greater protection to the tenant than that of a licence. A tenant may enjoy its right to occupy the land until that right expires at the end of the term and, importantly, may enforce its rights against third parties.

Conversely, the rights conferred by a licence are based in contract, not property. A holder of a licence (a licensee) cannot enforce its rights against third parties, it may or may not have exclusive possession and may have its licence revoked by the grantor at any time. Depending on the terms of the contract or agreement, whilst termination of a licence may be a breach of the contract, the licensee will nevertheless no longer have authority to enter the land.

Another important difference to note is the protection afforded to a tenant under statute. A tenant will be entitled to protection under the respective Property Law Acts and possibly Retail Leasing legislation of each State, such legislation making it difficult for landlords to bring a lease to an end, even where default exists. Such protections do not extend to licensees.

In the leading English case Street v Mountford, a 1985 decision of the House of Lords, the Court held that if these key factors are satisfied a lease will be created:

  1. intention to create legal relations;
  2. exclusive possession; and
  3. fixed term or periodic term at a rent.

The questions you should ask when entering into an occupancy relationship include: What kind of interest do you want to create? Should the incoming party have possession of the area to the exclusion of everybody else, including you? Will the occupancy be for a fixed period? On what grounds can you terminate the agreement and re-enter the premises? Will the provisions of the Property Law Act or Retail Leases Act apply?

Considering these issues before entering into an agreement will help you to choose the most appropriate form of occupancy.

A few points to note:

  • Should a Court be required to determine the nature of the relationship they will look at the parties’ intention and conduct prior to entering into the agreement and not what may have occurred or been said afterwards.
  • It is not enough to merely call the occupancy document a ‘lease’ or a ‘licence’. When determining the nature of the relationship a Court will look at the substance of the agreement and not merely the label put on it.

So, our tips:

  • Be aware that there are different interests you may grant to businesses or individuals coming onto your premises and these interests confer different rights.
  • Know the type of interest you intend to grant before committing to an arrangement.

    Dan Flynn, Partner
    Melbourne

Newsletter Article 18 March 2015
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