Renting Business Premises

What is the difference between a lease and licence to occupy?

A lease is a legal document issued by the property owner or landlord that gives your business the exclusive right to occupy premises as a tenant for a fixed term.

Licence to occupy

A licence to occupy is a flexible short-term agreement that enables your organisation to occupy premises on ‘easy-in, easy-out’ terms. It can be a good option if you are unsure about how long you want to occupy the premises.

Some key features of a licence include:

• They are short term, often requiring only a month’s notice to quit from either party.
• Can be used on a temporary basis whilst you negotiate a full lease.
• Under a licence, you don’t enjoy “security of tenure” which means you don’t have a legal right to stay in the property when the licence ends.
• Rent is not controlled by the law.
• You don’t have an exclusive right to the property.

Exclusive rights

Exclusivity is an important distinction between leases and licences to occupy. Put simply, exclusivity means only you can use the premises. Non-exclusivity means the landlord or owner can also use the premises.

So, if your project needs full exclusive use of the premises, a lease is going to be more appropriate. If you don’t mind sharing part or all of the space then a licence may be a simple way of using the premises.

Lease agreement

A lease agreement sets out the rights and obligations of both you and your landlord. Here are the terms usually covered in a lease agreement:

• Lease term. This may be between three and five years, but can be longer, with some as long as 25 years or more.
• Notice period to terminate the agreement, including break clauses. These clauses allow you (and/or the landlord) to end the agreement early, after a specified length of time.
• Value of the rent and review dates. Rent may be charged monthly or quarterly in advance and may be subject to VAT. The agreement may allow your landlord to review the rent regularly.
• Insurance obligations. It should be clear who is responsible for insuring the premises.
• Access rights. Do you have access to the premises at all times? How do you access the premises? Does the landlord have any rights of access? Is access provided to any shared areas in a multi-let building?
• Repairs and renewals. What responsibilities do you have for maintenance and repairs to the premises? If you are responsible for repairs and maintenance on an old or unique building these costs can be high and you should consult specialist advice before agreeing to be responsible.
• Decoration and signs. You may need the landlord’s permission for any signs you want to install at the premises.
• Service charge. You might have to pay an additional fee for shared services provided by the landlord. Service charges usually cover the cost of shared spaces (such as lifts, reception, gardens etc).
• Security measures. A lease agreement usually specifies who is responsible for the security of the premises.
• Use. A lease agreement will usually say how you can use the premises.
• Provision of services. The agreement should specify whether you or the landlord is responsible for installing, maintaining and paying for services and other utilities such as water and broadband connectivity.

The process of agreeing a lease

The process of agreeing a lease involves three key stages:

• Agreement of heads of terms. This is a summary of the agreement between both parties in the potential lease agreement. It is often a legal looking document but is unlikely to be a legally binding document. It shows the intention of you and the landlord to enter into a lease.
• Lease negotiations. When negotiating a lease, you should make sure that you understand all costs and responsibilities. Always seek specialist advice if you are unsure as you may be signing up for something not appropriate for your organisation.
• The signing of the lease. The lease, once signed, is a legally binding document.

Obligations as a tenant

Once you sign the lease, the landlord will expect you to maintain the property to a reasonable standard.

Other obligations could include taking out appropriate insurance, paying business rates and complying with health and safety regulations.

At the end of the lease, you should leave the property in an acceptable state of repair. Many commercial landlords will require you to restore the premises to their original condition when leaving.

It’s important to be able to provide evidence to your landlord that you have met all your obligations. When you first move in, it’s a good idea to take photos of the premises, and certainly where there is damage. Then you have a good record of how it was so you can make sure it is the same when you stop using it.

Rights as a tenant

The purpose of renting the premises is to run your business or put on your project. Subject to any restrictions in the lease agreement, you are entitled to use the premises in any lawful way you choose in order to carry out your business activities.

You also have the right to lay out the premises as you think appropriate, as long as you are not breaking the terms of your lease. If you want to make big changes to the appearance of the interior, you will probably need your landlord’s approval. You might also need planning permission.

Costs to expect when renting business premises

• Rent and rates. You may need to pay an initial deposit as security (which could be up to six months’ rent). You’ll need to pay rent and business rates on time.
• Service charges.
• Legal fees. It’s a good idea to ask a solicitor to check the lease and make sure it meets your needs. Money spent on professional advice at this stage can prevent expensive legal disputes.
• Installation of landline telephones and broadband, depending on the terms of your lease.
• Insurance premiums. It is important to know in advance what needs to be insured.
• Legal compliance. Are you opening up the premises to the public for the first time? If so, you must comply with relevant regulations covering accessibility and health and safety before you start trading. This may involve costly modifications, so it’s vital to check whether these adjustments are your responsibility or the landlord’s.
• Internal furnishings and fittings.

Use our Cashflow Checklist to help you assess what you can and can’t afford when running a premises.

Terminating a lease

It is important to check that if you want to leave the premises before the lease period ends, the terms of the agreement allow you to end, sub-let or reassign the lease.

The lease will say how much notice to terminate you must give to the landlord. You should check the wording of the termination clause carefully. You or the landlord may be able to terminate with a period of notice, but under some commercial leases this is not possible.

Once you give notice of your plans to leave the premises, the landlord will visit the premises and prepare the ‘schedule of dilapidations’. This is a list of all the repairs and alterations you are responsible for. You may carry out any necessary repairs yourself, or allow the landlord to carry them out and charge you for the work.

Hints and tips

• It is important to plan ahead and work out the timescales and costs of moving into new premises.
• The landlord is likely to require a financial reference and may ask you for personal guarantees to cover the rent payments. A returnable deposit may be an alternative to providing a personal guarantee.
• It is essential to check all obligations under the lease, especially any restrictions on alterations that you can make to the interior and exterior of the premises.
• If changing the use of the premises, you may need planning approval from your local authority. You should make sure any necessary planning approvals are in place before signing a lease agreement.
• You should take legal advice when reviewing the terms of the agreement.
• Every commercial agreement is different, so it’s very important to review all leases properly.

Case Studies

Whilst the above might sound formal, there is a wealth of opportunity for creative people and organisations to make use of spaces and premises that others can’t imagine. Have a look at some of these examples of how spaces can be utilised when the right collaborations come together:

• Blue House Yard Wood Green
• Somerset House
• NCVO – could there be a space here you can use in a creative way?

Are you reading this page as part of our Guide for Opening, Running and Growing a Cultural or Community Space? Have a look at Assignment and Subletting next.

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DISCLAIMER While all reasonable efforts have been made, the publisher makes no warranties that this information is accurate and up-to-date and will not be responsible for any errors or omissions in the information nor any consequences of any errors or omissions. Professional advice should be sought where appropriate.