Moving into licensed property is easier, quicker and cheaper than taking on a lease or buying a freehold property. Licensed properties are often ideal for start-ups and smaller businesses.
However, you still need to be sure that you are choosing the right premises and understand what you are agreeing to.
1. Licence or lease?
The difference between a licence and a lease can become blurred, but there tend to be several practical differences.
They last for different periods of time
- Licences cover a relatively short period of time - up to two years
- Leases usually run for many years.
Most licences give both landlord and occupier the right to terminate the agreement
- Usually this will be done by giving so many weeks' or months' notice. Alternatively, the party wishing to end the agreement may be required to give formal notice on a specified date.
- A notice period of one month is typical.
- Licensed properties with short notice periods like this are often referred to as easy-in, easy-out premises.
You have no right to renew a licence, once the landlord asks you to leave
- Many landlords prefer to offer licences for this reason.
- In practice, the landlord will not usually want to move you out if you are a good tenant.
You do not need to spend a lot of money upfront with a licence
- Solicitor's fees should be low (typically £200 to £400 plus VAT).
- You will need to pay some rent in advance, but usually only one month.
- You may be asked to pay a deposit. Typically, this will be the equivalent of one month's rent.
- See Costs.
The variety of premises available on a licensed basis is relatively limited
- There are plenty of small offices, studios and workshop units available on licence in most parts of the country.
- Your local council or Enterprise Agency may maintain a property register which lists both licensed and leased premises.
- Some local authorities and Enterprise Agencies offer easy-in, easy-out licences for small business centres they own. These are sometimes offered at subsidised rates.
- Some private landlords with hard-to-let properties may grant licences while they are seeking tenants to take on a long lease. Some offer fully-serviced offices on licence.
- If the nature of your business means that you need specialised premises, you may have to look for leased property instead.
2. What the agreement covers
A licence represents a legal agreement with the landlord. The agreement should be short, simple and written in plain English, but you will still need to check all the details thoroughly.
Is the name of the landlord correct?
- Does the landlord (the licensor) own the property?
- Does the landlord have the right to grant licences in this way?
- Even property licences arranged with local authorities and Enterprise Agencies need to be checked.
Are the basic details all correct?
- Are your name (given under 'licensee'), the period of the licence, the address and description of the premises, and the notice period all correct?
- If you trade as a limited company, make sure the licence is made out in the name of your company and not your personal name.
- Does the agreement include the correct rent (licence fee)?
Does the agreement specifically cover all the services you expect at no extra cost?
- electricity, heating and air conditioning;
- communal services, including reception and any security services, and the use of toilets, kitchens and other common parts of the premises;
- cleaning, window cleaning and refuse collection.
Does the agreement include other services and facilities you are expecting?
For example, do they offer (and at what cost):
- office services, such as a telephone answering service, printing and copying;
- basic office furniture;
- telephone lines, including the lines you may need for internet access;
- parking spaces.
What else does the licence agreement cover?
Typical clauses will say that:
- You may not transfer the licence, sublet all or part of the premises, or share the space with others.
- You do not acquire any tenancy or leasehold rights.
- You and your employees must all conform to the terms of the licence.
- You are not allowed to alter the premises in any way - even to make improvements at your own expense.
- The landlord will not be liable for any of your losses.
- The landlord is responsible for the repair and maintenance of the property and the provision of communal services.
- The landlord is responsible for insuring the premises, and any furnishings and fixtures that come with the premises. All other insurances are usually your responsibility.
Be prepared to negotiate to win more favourable terms
- Consult a solicitor before signing the agreement.
3. Real flexibility
Flexibility matters for a new or growing business, as it can often be impossible to predict sales volumes and activity levels more than a few weeks in advance.
Going into a serviced office block may mean you can expand easily
- You may be able to rent extra office, storage or meeting room space for short periods or special projects.
- As the business expands, you may be able to take on extra offices in the building one by one, so that you are only ever renting the accommodation you need at that time.
- You may want to switch offices entirely, into larger or better accommodation in the same building.
- Being able to grow like this, with minimal disruption and keeping the same address, can be a great advantage for an expanding start-up business.
You may have flexible access to office services and equipment on a pay-as-you-go basis
- Many landlords with offices on licence provide additional services as optional extras for their tenants.
- Paying for these when you need them may be a better short-term option than taking on more employees.
- Being able to delay or avoid buying equipment like photocopiers may be helpful.
4. Check the licence before you sign
Certain problems occur fairly frequently with premises rented on licences. If you can discuss possible difficulties in advance, you may be able to agree workable practical arrangements before signing the contract.
Limited access can create operational problems for you
- Will you have unrestricted access to the building in the evening, at night and at weekends? Will this create security problems for the landlord?
Will you be able to operate within the working restrictions that affect the premises?
- Is your business likely to generate streams of visitors or to produce noises, smells, waste or any other nuisance that will affect your neighbours?
- Does the licence allow you to put up exterior signage if you wish, or carry out minor alterations to the property?
Are the other occupants suitable neighbours for your business?
- Will their activities create a nuisance for you?
- Might new, unsuitable neighbours move in at some future date?
5. Potential licence flashpoints
Your contractual and working relationships with your landlord are particularly important in licensed offices.
Both parties should be clear about how any deposit is to be treated
- When will your money be refunded?
- What deductions is the landlord entitled to make?
- Will you be entitled to interest on the deposit?
- Will the deposit be held separately from the landlord's business funds? What happens if the landlord goes bankrupt?
Fixed-term contracts may mean you lose much of the flexibility of licensing
- Beware of any licence with a long fixed term that does not give you an explicit and unconditional right to break off the agreement.
- Check that the conditions attached to any break clause are reasonable. Watch out for clauses that prevent you terminating the agreement unless you have fully performed all the terms of the licence, to the letter.
- Try to establish whether the landlord is someone you can have a good relationship with. A bad landlord, or a well-meaning one who does not keep promises, can lead to all sorts of recurring headaches.
- Ask other licensees about the landlord's performance in the past and the standard of the services provided. If other tenants complain that the receptionist is never there or the copier is always broken, take this as a warning.
- Look at the state of the building and form your own opinion about how well it is maintained.
6. What will a licence cost?
Use total cost (not just rent) per square foot as a yardstick for comparing premises
Extra costs, and particularly service charges, can be high.
- How much is the monthly rent? Is it fixed, or does the landlord have the right to increase it?
- Most landlords are unlikely to raise your rent, as the licence will only be for a short period. But some agreements give the landlord the right to increase the rent, with one month's notice, after a fixed length of time.
- The rent should usually include business rates and most services such as heating and reception costs.
Find out whether VAT will be charged on the rent
- This will depend largely on the building and on the landlord's financial and business circumstances.
- Even if the rent does not include VAT now, the landlord may decide (or be compelled) to charge VAT at some future date.
- If you are registered for VAT, you will normally be able to claim the VAT back.
Will the charges for extra facilities and services be reasonable?
- How are these charges going to be calculated? For example, does the landlord add a mark-up in order to make a profit, or will you pay the standard rate?
- Is there a minimum charge for any service, even if you rarely use it (eg the photocopier)?
- How are the charges for utility services measured?
- Check the energy efficiency rating of the building. This can be a good indicator of likely energy costs. All landlords must provide potential tenants with an Energy Performance Certificate when they rent out a building.
- Ask other tenants in the building if they are happy with what they have been charged for extra costs.
Will you have any setting-up costs?
The rules of the game
A licence will place you under certain obligations and give your landlord some rights that are not widely known.
These typically include:
- paying the licence fee (rent);
- paying the landlord appropriate amounts for extra office services used;
- using the premises and equipment in a reasonable manner;
- observing the rules of the premises (which should usually form part of the licence agreement).
There may be unacceptable obligations or limitations
- For example, you may not be allowed to make any physical alterations to the premises - even including putting up shelves and partitions.
- Check whether there are other obligations in the licence agreement which are unacceptable to you. For example, are you required to repair or redecorate the premises?
The landlord's rights
These usually include:
- The right to ask you to move to alternative, but comparable, rooms in the same property. If you stay in the same place for six months or more, the landlord's legal right to move or evict you may be weakened (even if the licence has expired) - so the landlord may prefer to move you around periodically.
- The right to terminate the licence if you fail to pay any money owed on time and in full, or breach any of your other obligations.
- The right of access to your premises at any time.