What is the Difference Between a Lease and a Licence?

For owners and occupiers of commercial property, one of the most important legal distinctions for both landlords and tenants to understand is whether the arrangement is a ‘lease’ or a ‘licence’.

Though the terms are often used interchangeably in the property industry, they embody very different legal rights and obligations under English Property Law.

Key Takeaways

• A lease grants exclusive possession and a legal interest in land, whereas a licence grants permission to occupy without creating a property right.
• Security of tenure under the Landlord and Tenant Act 1954 may apply to qualifying leases, but licence holders have no statutory protection.
• The courts will assess the substance of the arrangement, not its label, meaning a licence can unintentionally become a lease if exclusive possession and rent are present.
• Choosing the correct structure is essential, as the legal, financial, and practical consequences for landlords and tenants can be significant.

What is a Lease?

A lease grants a tenant the exclusive possession of a property for a defined term (period of time), usually in exchange for an agreed monetary rent.

Exclusive possession means the tenant can treat the property as their own space and has the right to exclude others save for third parties with legal rights and the landlord in certain circumstances, such as for intermittent inspections, repairs or in case of emergency.

A registered lease is a form of legal estate in land, which gives the tenant a legal right to occupy the property. It grants the tenant a leasehold property interest, which does not end if the landlord sells their superior interest in the property.

Leases for a duration of 7+ years are required to be formally registered at HM Land Registry, and for leases with a shorter term, the easements (legal permissions and rights granted to the tenant can be noted against the landlord’s registered title at HM Land Registry.

Leases can often be assigned (transferred or sold), sublet, or renewed, subject to the lease provisions and fulfilment of specific conditions. Leases may also incorporate a break option, whereby a party can exercise their break right and serve notice on the other to terminate the lease early (i.e. before the end of the defined term).

Example of a Lease

A bookshop-café operator takes a 5-year lease of a high-street shop unit, which forms part of their landlord’s building. They pay the landlord a monetary annual rent and contribute towards the landlord’s buildings insurance policy costs.

The landlord cannot enter the shop unit except for periodic inspection of the condition of the property, for connecting into existing service media that serves the remainder of their building or for maintenance purposes.

The tenant controls how the let space is used, provided they continue to pay the rent and remain within the remit of their permitted user clause (this clause sets the rules for how they can use the space).

This is a lease – the tenant has exclusive possession for a fixed term.

What is a Licence?

A licence gives a person or entity permission to use a property but does not give them any legal ownership.

It means you’re allowed to occupy and use the space (which you would ordinarily not be permitted to do), but you do not own it, nor do you have any legal rights to it. You cannot pass that permission on to anyone else, and the arrangement will usually end if the owner sells or transfers the property.

The landlord or ‘licensor’ can enter the property at any time, often without notice, and can even opt to move the licensee to alternative accommodation, at their discretion.

It is typically used for short-term, flexible arrangements and can usually be terminated at short notice. Licences are often appropriate where the occupier shares a space with others, such as in a shared office or vast retail space and are most fitting when the arrangement is intended to be strictly temporary.

Licences should not require the licensee to pay rent at regular intervals – this could indicate that a periodic tenancy has arisen, which can then not be immediately terminated by the licensor.

Example of a Licence

A Christmas pop-up retailer takes a three-month licence to use part of a shopping centre during the festive season, in exchange for a fixed licence fee. The licensor can move the occupier to a different unit in the shopping centre or enter the unit at any time, without the requirement for prior notice.

This is a description of a licence – permission to use, not possession.

Key Legal Distinctions for a Lease vs. a Licence

Lease vs. Licence: Why the Difference Matters

The distinction between a lease and a licence is not just academic. It matters because the scope determines a range of legal, practical and economic factors:

• Security of tenure: Under the security of tenure provisions of the Landlord and Tenant Act 1954 (LTA 1954), business tenants with a protected lease (who have not contracted out of the statutory provisions) have the right to stay in the property and apply to renew their lease when it ends on broadly the same terms. The landlord can only refuse on specific grounds. Licence holders have no such rights – their permission to occupy and use the property can end when the licence does.

• Control and flexibility: Landlords may prefer a licence for flexibility, but if the occupier is granted too much control or pays rent regularly, it could be re-classified as a lease. If that happens, the landlord can’t end the tenancy as easily as they could with a licence.
• Tax and business rates: Tenants under leases are generally responsible for business rates, while licencees may not be. Stamp Duty Land Tax may be due to HMRC upon the grant of a lease, but this does not apply to licences.
• Enforceability: The courts look at the substance of the arrangement, not the label of the document. If an occupier has exclusive possession and pays rent for a set period, it may be judged to be a ‘lease’ in essence, even if the document heading states it is a ‘licence’.

The difference between a lease and a licence is fundamental in Commercial Property Law. Getting it wrong can have costly consequences for both landlords and tenants. Before entering into any occupancy arrangement, professional advice should always be sought.

How Howell Jones Solicitors Can Help You

At Howell Jones, our commercial property solicitors in Surrey advise both landlords and tenants on all aspects of commercial leases and licences to occupy, including drafting, negotiation, and renewal.

For clear, balanced, practical advice on the right agreement for your business, please reach out to us on 0800 011 9813.