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Why property owners should know the difference between a lease and a licence

You may have businesses that operate and occupy part of your property. If this is the case it is important that the legal nature of the occupancy is made clear and is documented in writing.

Both leases and licences grant the right to enter and use someone else’s land but there is a distinct difference between the two. When granting a right for another party to use your property it is important that you are aware of the difference between a lease and a licence and that the appropriate one is chosen.

What is a lease?

A lease is a deed by which one party grants another party the right to use their land to the exclusion of others (referred to as ‘exclusive possession’) for a specified time, usually in return for payment of rent. Importantly, the rights of a tenant under a lease can be enforced against third parties.

What is a licence?

The rights granted by a licence are based in contract (in the case of leases the rights are based in property law). The licencee (being the holder of the licence) cannot enforce its rights against third parties.

What are the differences between a lease and a licence

The fundamental distinction between a lease and a licence is exclusive possession. As such a lease is the grant of an interest in land (technical legal term is that a lease ‘runs with the land’ so that when the land is sold the new owner must honour the terms of the lease) and a licence is the grant of personal permission to enter and use the property for a particular purpose. A lease gives greater protection to a tenant than a licence.

There is also the protection that a tenant under a lease has pursuant to legislation such as the Property Law Acts and in certain circumstances the Retail Leasing legislation that each State has. This legislation can make it hard for landlords to end leases to an end, even where the tenant has defaulted. Licensees are not afforded such protection.

Examples of typical lease situations are:

  • Living in someone else’s house and pay rent;
  • The owner of a shopping complex allowing a business to operate a shop in the complex; and
  • An agreement between an owner of a hall and a dance studio to hire the hall for dance lessons.

Examples of situations which might amount to a licence are:

  • The right to cut wood on someone’s land. This provides a grant to use the land but also to take from the land;
  • A builder to enter land to undertake work on the owner’s property; and
  • Purchasing a ticket to a football game. This gives the ticket holder the non-exclusive right to enter the stadium and watch the game.

The law is clear that if the following points are satisfied a lease will exist:

  • intention to create a legal relationship;
  • the tenant is granted exclusive possession of the premises; and
  • there is a fixed term for the tenant to occupy and payment of rent.

If there is no written document that sets out the parties’ intentions or where the document is unclear, if the relationship between the parties breaks down difficulties will arise as to whether an arrangement is a lease or a licence.

To avoid such confusion, the following points should be considered:

  • Is the occupancy for a fixed period?
  • Should the occupying party have exclusive possession?
  • Will the provisions of the relevant Property Law Act or Retail Leases Act apply?
  • What are the grounds for termination of the agreement?

Considering the above will help the parties choose the most appropriate form of occupancy.

It is important to note that it is not enough to merely call the document a ‘lease’ or a ‘licence’. If a Court is asked to determine the nature of the relationship between the parties it will look at the substance of the agreement and not what the parties have called it.

Cormiston Legal can advise you in relation to the appropriate agreement in relation to your circumstances. We can also assist in the preparation or review of leases and licences for Landlords, Tenants, Licensors and Licensees.

Please contact us on 03 6332 9353 if you would like to discuss your leasing or licensing requirements.

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