Leases and Licences – What’s The Difference Anyway?

By Evelyn Marcou, Senior Associate, MST Lawyers

To the untrained eye, leases and licences may appear to effectively do the same thing.  In reality, they are two very different beasts and it is important for anyone entering into one or the other, to understand some of the fundamental differences.

There are differences in the nature, rights and obligations that arise under each arrangement.

Nature

A lease is a grant of rights to a party for the exclusive possession or occupation of land, to the exclusion of all others, for a determinate period of time. The tenant of a lease is able to exclude all others, including the landlord (except in certain circumstances) from the land and can enjoy all of the benefits of being the occupier of the land. 

A licence is permission to enter onto land for a specific purpose where entry on the land would otherwise be trespass.  Usually, a licence will not give the licensee rights to exclude others from the land. The licence is usually given for valuable consideration (a licence fee) and usually operates in relation to specific rights – a right to use designated car spaces, a right to install signage or a right to access amenities in a common area. 

Rights

A lease creates a proprietary interest in the land and can be recorded on the title to the property.

A lease is binding on third parties (for example mortgagees and purchases of the land) and in most instances, on the sale of land, a lease will continue to operate and the new owner will be bound to honour the terms and conditions of the lease.

A lease is usually very detailed about the rights and obligations of both parties and very prescriptive.

A licence does not create an interest in the land. 

Most licences only create ‘personal’ interests and as such, licences are not usually transferable to successors or for example, to a purchaser of a business that has the benefit of a licence.

Generally, a licence does not bind third parties.  On the sale of land, a bare licence given by a previous owner of the land automatically ceases to be operative.

Obligations

In the absence of any contractual or statutory restrictions, a lease, by its nature, is capable of assignment provided a tenant has complied with the relevant assignment provisions of the lease and any relevant leasing legislation.

Usually, the benefit of a licence may only be assigned in certain, limited circumstances. The default position with a licence is that, as it only creates personal interests and rights, it is not assignable. Certainly in a commercial transaction assumptions should not be made about the assignability of a licence. Most contractual licences are expressed to be non-assignable.

When it comes to granting sub rights, most leases contain provisions allowing the grant of a sub-lease under certain conditions. Conversely, most contractual licences will specifically prohibit the grant of a sub-licence. Again, this stems from the proposition that the grant of a licence is a personal right.

A Cautionary Word

Just because a document is called a “lease” or a “licence”, it does not necessarily mean it is correctly described. An analysis of the terms and conditions of the document will determine its true nature. It is not uncommon to see a document labelled a “licence” when the content of the document and the arrangement between the parties by its nature, effectively constitutes a lease.

It is important that parties entering into both leases and licences understand the differences so that they can consider if a lease or licence will better suit their needs. Certainly, in a business context, the difference between the two can have a significant impact on the operation and the potential sale of a business.

For further information about leases and licences, please contact Evelyn Marcou from our Property & Leasing team by email or by telephone +61 3 8540 0200.