The two most common ways of letting out or sub-letting commercial premises are licenses and leases. In his latest article, business rates advisor Mark Allen takes readers through some important differences.
It seems sensible that the renter or occupant of a business premises may require an explanation as to the difference between licenses and leases.
It is important to understand that the nature of the occupancy will determine who is liable for the business rates on the property by law.
A license allows you to occupy and use the property for commercial reasons, preventing the occupation from being trespassed, but because the license can be non-exclusive, other people can also occupy the property under a separate license.
The landlord will hold rights of possession and the licensee partial possession depending on others being in occupation, each responsible for their part.
If the licensee is the only occupant then they indeed have exclusive possession and will be liable for the business rates. If the landlord holds rights of exclusive possession they are liable for the business rates.
The licensee would be responsible for the inside area and the landlord for the outside of the property and the land. Using this method of renting allows the landlord flexibility for more than one occupant and also short-term licensing.
If there is more than one occupant or the occupant has to vacate the property at certain times then it can be seen that they do not have exclusive possession, and the liability for business rates is that of the landlords.
The license does not necessarily allow exclusive possession of the property. A license is not a lease, it simply allows the licensee to use a specified part of the premises for activities as authorized.
When the agreement ends the licensee must leave the premises unless the landlord has agreed to renew the contract/license, the new license may differ from the original agreement.
There seem to be more opportunities for either party to release themselves from a license due to its nature, for example the owner not keeping the structure of the building sound or letting the land go wild leading to vermin, also the licensee may not respect the internal area of the building.
If a situation occurs and the licensee releases themselves from the license exclusive possession of the premises and responsibility for the business rates reverts back to the landlord.
As soon as the responsibility becomes that of the landlord an email must be sent to the council to make them aware of the change in circumstances. I have found on occasions that councils have not always been told of the change of possession and that it has reverted back to the landlord.
This has caused problems and confusion when the council sends out the rates bill to the previous occupant, instead of the landlord leading to the landlord on occasion denying repossession of the building.
Leases are different from licenses as they show exclusive possession of the land as identified in the lease. It should also show a time period for which it is active and for clarity the rent should be included.
As the lease shows exclusive possession it is then clear who owes the business rates. The occupant whose name is on the lease or the named limited company on the lease.
Actual possession gives the lease holder the rights of the landowner who can then refuse the owner entry and act within the agreed terms.
The landowner will often have clauses to allow entry to inspect or repair the property although an appointment may have to be arranged if required.
If the terms of the lease are broken, the landlord who leased out the premises then has right of entry to repossess the property, such as changing the locks.
If the locks are changed or any other activity takes place by the landlord to restrict or interfere with exclusive possession then the occupation beneficial, permanent and exclusive are no longer in place so business rates liability reverts back to the landlord.
The lease also provides the occupant with permanent occupation to satisfy the occupation a duration minimum of six months is required, to confirm the business rates liability is transferred to the occupant.
As soon as the exclusive possession is lost, the council must be informed the lease has been broken and the business rates responsibility has reverted back to the landlord, so they can update their billing system.
This needs to be done via email so there is evidence of the transfer of rates responsibility. On occasion, we have had to approach councils to reaffirm this position.
The occupier is also regarded as having beneficial occupation even if the rent is less than any profit, this will not affect the fact that the occupant is responsible for the rates.
The exclusive occupation realizes that the occupant who has signed the lease personally if a private company or the named company if limited, benefits in terms of no one else being given the rights to use the land.
This helps prevent the actual land owner from interfering with the land use to the detriment of the lease holder who pays rent for the exclusive occupation of the premises.
It is the lease and occupation with exclusive possession which proves that the occupant is liable for the business rates.
Actual possession: The person or company who is on the land and utilising it.
Exclusive occupation: The person or company who occupies the land to the exclusion of anyone else and whose occupation is paramount.
Beneficial occupation: The person or company who gains benefit from occupation and will pay a rent as regards the value of which the property is able to support.
Permanent occupation: An occupation for a minimum of six months or a continuous short term agreement.