As your business grows and changes, you may be interested in expanding to a new premise. However, it may be unclear what type of agreement is best suited to aid this change. The two most common agreements in New Zealand are a lease and a licence agreement. This article will outline what a licence agreement is and detail the differences between a lease and a licence agreement, to aid in deciding what is best for your business.
What Is a Licence Agreement?
A licence agreement is a contract where a licensor (the property owner) provides one person or business with permission to enter the land or premises and use these premises for some stated purpose. For commercial licence agreements, this may be to:
- sell products;
- provide a service or services; or
- use as office space for your business.
A licence agreement will typically contain provisions concerning the:
- premises to be licensed. The agreement should clearly state the boundary of these premises;
- purpose of the licence;
- length of the licence; and
- payment for the use of the licensed property. This may be a weekly or monthly rent or a one-off license fee.
What Is the Difference Between a Lease and a Licence Agreement?
A lease is, usually, a written contract that provides one party (the tenant) a legal estate in the leased premises. A lease can either be commercial or residential.
As both types of agreements relate to the use of land, a lease and a licence agreement may appear indistinguishable. However, there are two key differences between these agreements.
Legal Right to Exclusive Possession
It may seem that a licensee (someone who receives a licence) and a tenant have exclusive possession of the premises they inhabit. However, only a lease provides an individual or a business with the legal right of exclusive possession.
Exclusive possession means the right to exclude other persons from the premises you are leasing. This right even extends to the owner of the premises (the landlord), except where they have a legal right to entry. The landlord has a right to enter the premises to:
- repair damage;
- inspect the space; or
- serve a notice to cancel the lease.
The presence of the following will likely indicate that your business has a right to exclusive possession:
- there is a minimum finite term to the possession of the premises. This term may be fixed or periodic;
- there is a physical boundary to the premises. For example, you are in a building, in comparison to having a specific space in the middle of a shopping centre; and
- both you and the landlord intend for you to have exclusive possession of the premises for the specified period.
If the right to exclusive possession has not been granted, then it is likely a licence agreement.
Proprietary Interest
Leases give tenants exclusive rights of possession to the land, whilst licences are only an agreement to use the licensed space. This right of possession grants a tenant with specific legal rights and greater security under a lease. You do not inherit these rights through a licence agreement. Under a lease, a tenant can:
- sue a third party for trespass or nuisance;
- assign their lease and obligations to another person; and
- register their lease to ensure that the law protects their possession of the premises.
When Should I Use a Licence Agreement?
Whether your business enters into a lease or licence agreement will depend on what your business intends to use the space for, and the extent of legal rights it wishes to inherit. If your business intends to have a proprietary interest in and exclusive possession of the premises, it may be preferable to enter into a lease.
However, there are a range of instances where it is common to enter into a licence agreement:
- in a franchise agreement. Some franchisors licence out their premises to franchisees as this means that the lease remains under the legal entity of the franchise;
- if your business is opening a pop-up shop. It allows your business to occupy a space for a short term with fewer obligations than a lease; or
- if you operate your business in a co-working space. This may be an office space where multiple businesses operate.
Key Takeaways
Although both licence agreements and leases are contracts related to land use, there are two key differences. A lease provides a tenant with the right of exclusive possession to the leased premises and a proprietary interest in that land. A licence agreement does not grant such rights to the licensee and instead allows the licensee to inhabit a space for a specified period.
If your business is interested in entering into a lease or a licence agreement, LegalVision’s leasing lawyers can help. Get in touch with LegalVision on 0800 005 570 or complete the form on this page.
FAQs
A licence agreement is a contract where an owner of property provides another person or business with the permission to enter the premises and use it for some stated purpose.
The key difference between a lease and a licence agreement is that a tenant receives exclusive possession of the premises and proprietary interests in the land, whilst a licensee is not.
A licence agreement may be used in a franchise agreement. Some franchisors licence out their premises to franchisees as this means that the lease remains under the franchise’s legal entity.
It is essential to distinguish between a lease and a licence as the two types of agreement accompany different rights to the tenant and licensee.
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