If you or your business is occupying or planning to occupy space in a commercial premises, it’s important to understand whether the arrangement is, or will be, a lease or a licence to occupy.
While the two may look similar in practice, they create different legal rights, obligations and risks. Indeed, the name given to the document is not decisive and may sometimes be misleading. Just calling an agreement a “Licence to Occupy” does not mean that legally it is not in fact a lease, and vice versa.
What matters is what the agreement actually allows the occupier to do, particularly whether they have exclusive possession of defined premises or only permission to use space on more flexible terms.
For landlords, getting the structure wrong can mean granting more rights to the occupier than intended. Getting it wrong can result in it being more difficult to terminate the arrangement when they want or need to do so.
For occupiers, the distinction can affect security, flexibility, cost and the ability to plan ahead. The right option depends on the commercial purpose, the level of control required, and how long the arrangement is expected to last.
What is a commercial lease?
A commercial lease gives a named tenant the exclusive right to occupy defined premises for an agreed duration in return for rent or other consideration. It is usually appropriate where the occupier needs certainty, control and a stable base from which to operate.
In Scots law, the core elements of a lease include the parties, the premises, the rent, the term, and the grant of exclusive possession to the tenant.
What is a licence to occupy?
A licence to occupy is a more limited permission to use or occupy premises, or part of those premises, with the possibility that the area may be relocated during the term of the agreement. It is usually personal to the licensee and does not typically permit the assignment or transfer occupier’s interest to another party.
Licences are often used where the arrangement is short term, shared or flexible, or where the owner needs to retain day-to-day management of the space.
Key differences
Matter | Commercial lease | Licence to occupy |
Nature of right | A right to occupy defined premises, with exclusive possession. | A personal permission to use space, possibly without exclusive possession and potentially subject to the occupier being moved without compensation. |
Term | For a fixed term (although there may be an option to extend or a break clause). | Usually a short, often undefined term, frequently subject to rolling periods. |
Transfer | May be transferable or sub-let if the lease permits it. | Usually personal to the licensee and not transferable. |
Risk if mislabelled | A document called a licence may still be treated as a lease if it grants lease-style rights. | A licence must reflect the commercial reality and avoid giving exclusive possession if that is not intended. |
Best suited to | Ongoing business occupation, such as shops, offices, restaurants, workshops or warehouses. | Short-term or flexible use, such as pop-ups, serviced offices, activity clubs, event space or temporary storage. |
Why does the distinction matter?
The distinction matters because a lease and a licence do different jobs. A lease can give the tenant stronger rights in the premises and may bind successors in title, for example allowing a business to be built over time and potentially sold to another operator who can take on and continue the business from the premises. A licence to occupy does not give such security. A licence is normally a personal contractual permission only.
If a document is described as a licence but gives the occupier exclusive possession of defined premises for a period in return for rent, there is a risk that it will be treated as a lease. This may cause issues if the document was intended to be a short term licence to occupy as licences may be brought to an end more easily than a lease and the principle of tacit relocation will apply to leases.
When is a lease likely to be more appropriate?
A lease is usually more appropriate where the occupier needs exclusive use of clearly defined premises and expects to trade from them on an ongoing basis. This may include a shop, restaurant, warehouse, workshop, office suite, or other premises where the business needs operational certainty.
A lease is also likely to be the better structure where the occupier intends to invest in fit-out works, employ staff at the premises, register the premises as its trading address, or require stability for funding, regulatory or operational reasons. It may also be preferred by lenders.
The owner may also benefit more from a lease as it can support borrowing against the property, increase the property’s value and potentially make the property more attractive to purchasers seeking an investment property with a lease in place. In addition, a lease can provide greater certainty of rental income.
When is a licence likely to be more appropriate?
A licence is usually more appropriate where the arrangement is short term, flexible or shared, and where the owner will retain control of the premises, for example where the owner intends to redevelop the property but planning permission or consents are still some time away.
It may be suitable for pop-up trading, a concession within a larger store, serviced office space, hot desks, event space, temporary storage, or early access for limited works before a lease is completed.
To reduce the risk of confusion, a licence should make clear that the permission is personal, limited to the agreed purpose, and subject to the owner’s retained rights of access, management and control.
If the occupier is given a locked, self-contained area and can exclude the owner and others, the arrangement may start to look more like a lease and may provide the occupier with greater security of tenure, making it more difficult for the owner to remove the occupier and potentially requiring compliance with statutory notice periods.
Substance matters more than the label
Calling an agreement a “licence to occupy” will not, by itself, prevent it from being treated as a lease. The key question is what rights have actually been granted. If the occupier has exclusive possession of defined premises for a period in return for rent, the arrangement may carry lease consequences, even if the document uses licence language.
This is why the terms of the document should match what happens in practice. A licence should not be used simply because it feels quicker or more ‘light touch’ if the commercial reality is that the occupier will have exclusive control of the space.
How Lindsays can help
Whether you are a landlord granting occupation or a business taking space, careful drafting at the outset can help avoid uncertainty and future disputes. We can advise on the most appropriate structure for your commercial arrangement and prepare a lease or licence to occupy documentation that accurately reflects the commercial reality.
