Commercial property · 6 min read · 23 October 2026

Licence to occupy or lease? What decides it for business premises.

A licence to occupy agreement is a lease if it gives the occupier exclusive possession of the space for a term at a rent, whatever the document calls itself. That matters because a business tenancy usually carries security of tenure under Part II of the Landlord and Tenant Act 1954, and a licence does not. The label helps. The substance decides.

The test: exclusive possession, for a term, at a rent

The starting point is still the House of Lords decision in Street v Mountford [1985] AC 809. As the Upper Tribunal restated it in AP Wireless II (UK) Ltd v On Tower UK Ltd [2024] UKUT 263 (LC) at [74], whether an agreement creates a lease or a licence depends on whether it grants exclusive possession of the land for a term at a rent. If it does, and the exclusive possession is not referable to some other legal relationship, the result is a lease whatever label the parties put on it.

Lord Templeman's explanation, quoted at [75] of the same decision, is the one every property lawyer remembers: "The manufacture of a five pronged implement for manual digging results in a fork even if the manufacturer, unfamiliar with the English language, insists that he intended to make and has made a spade."

Street v Mountford concerned a flat, but the same principles apply to business premises. The Tribunal said so at [77], referring to Clear Channel UK Ltd v Manchester City Council [2005] EWCA Civ 1304, a dispute over advertising sites in which it was common ground that Street v Mountford applied.

What exclusive possession means

Exclusive possession is the right to keep everyone out, the owner included, apart from limited rights the owner reserves to enter, view and repair. Lord Templeman described it in those terms in Street v Mountford, in the passage quoted in London College of Business Ltd v Tareem Ltd [2018] EWHC 437 (Ch) at [12]. In Clear Channel the agreement related to undefined areas of the council's land around each advertising display, and that was fatal to any claim of exclusive possession: the Court of Appeal upheld the judge's finding at [26] and [27].

In practice, an occupier who shares space with the owner's other occupiers, can be moved to different space, or uses an area the owner continues to control is a long way from exclusive possession. An occupier who holds the keys to a defined unit and can lock the owner out is not.

The label helps, but it does not decide

The label the parties choose is indicative but not determinative, and the court looks at the whole agreement and the substance of the rights and obligations it creates (AP Wireless at [79] and [80]). That cuts both ways. In Clear Channel the Court of Appeal added, at [29], that where two substantial parties of equal bargaining power, with full legal advice, include a clause stating in unequivocal terms that the agreement is not a tenancy, it would take some persuading that its true effect was the opposite. A properly drafted business licence starts with that advantage, provided its operative terms match its label.

Why it matters: security of tenure

A tenancy is an interest in land, while a licence is a contractual right to occupy land (Hertfordshire County Council v Davies [2017] EWHC 1488 (QB) at [28]). Part II of the Landlord and Tenant Act 1954 applies to any tenancy where the premises are occupied by the tenant for the purposes of its business (section 23(1)), and such a tenancy does not come to an end unless it is terminated in accordance with Part II (section 24(1)). A true licence sits outside that regime, which is why owners use it for arrangements they need to be able to end.

Where the occupier needs exclusive use of defined space, the Act offers a cleaner route. A lease for a term of years certain can be contracted out of sections 24 to 28 under section 38A, but the agreement is void unless the landlord has served the prescribed warning notice and the requirements of Schedule 2 to the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003 are met (section 38A(3)). The tenant makes a simple declaration if the warning notice was received at least 14 days before it entered into the tenancy, and a statutory declaration if not (TFS Stores Ltd v Designer Retail Outlet Centres (Mansfield) General Partner Ltd [2021] EWCA Civ 688 at [20]).

Very short lettings fall outside the Act in any event: section 43(3) disapplies it for a tenancy granted for a term certain not exceeding six months, unless the tenancy provides for renewal or extension beyond six months, or the tenant, with any predecessor in its business, has been in occupation for more than twelve months.

When a licence to occupy is the right tool

• Shared or flexible workspace, where the owner allocates desks or rooms and can move occupiers around.
• Short term use of part of a site: a pop up, a stand, storage in a shared area, or advertising space.
• Concessions inside another business's premises, where the host controls the space, access and opening hours.
• Limited access before a lease completes, for example to measure up or start fitting out, where the owner keeps control and the lease follows promptly.

The last of those needs the most care. If early access in substance gives exclusive possession of defined premises for a term at a rent, it is a tenancy on the test above, and a tenancy that was never contracted out. The licence period, the space and the obligation to complete the lease have to be drafted to line up.

Drafting points that keep it a licence

• Do not grant exclusive possession. Reserve a real right to share the space or to move the occupier to comparable space, and keep the owner's control of the building, access and security.
• Describe an area within the owner's premises for a stated purpose, rather than demising defined premises.
• Keep it personal, non assignable and terminable on short notice.
• Make the operative terms match the label. A document that reads like a lease, with a fixed term, a full repairing covenant and a covenant for quiet enjoyment, invites the argument that it is one.
• Run the arrangement the way the document describes it. An agreement that says one thing while the parties do another invites a dispute about what was really agreed.

What we do, and where the line is

For a licence to occupy we draft or review the agreement from £550, fixed in writing before any work begins: the space, exclusivity, payments, termination and the terms that keep it a licence. Where the facts point to a lease, we say so and set out the alternatives, including a contracted out lease on the lease schedule. Execution of any deed and every Land Registry step go to an instructed authorised solicitor, and we do not act on the grant or assignment of a lease for a premium.