Licence to Occupy: Commercial vs Residential Property

For anyone involved in property,  whether as a landlord, occupier, or professional adviser, it is important to understand the distinction between a commercial licence to occupy and a residential one. At first glance, both arrangements look similar: they grant permission to use a space without conferring full tenancy rights. In practice, however, the two operate under very different rules.

A commercial licence is usually designed for flexibility, allowing businesses to use premises without the weight of long-term lease obligations. By contrast, a residential licence touches on housing law, where occupiers are afforded far greater statutory protection. The financial implications, the rights each party can rely on, and the risks that come with getting it wrong all vary sharply between the two.

This guide takes a closer look at those differences, highlighting when a licence might be the right structure to use, and where the hidden pitfalls lie.

What is a Licence to Occupy?

A licence to occupy is a contractual permission to use premises without creating property ownership rights or a tenancy. Unlike a lease, it does not grant an estate in land.

Courts focus on whether the occupier enjoys exclusive possession:

• Exclusive possession + rent + fixed term → usually a lease ( Street v Mountford UKHL 4 ).
• Shared use, landlord’s controls, or reserved rights of access → usually a licence ( AG Securities v Vaughan UKHL 8 ).

This matters because leases carry statutory protections, such as security of tenure, protection from eviction, among others, while licences are far more limited.

Meaning of Commercial Licence to Occupy 

For businesses, commercial licences provide flexible short‑term use of space such as high street shops, warehouses, pop‑up retail, or serviced offices. They allow use without triggering tenancy rights under the Landlord and Tenant Act 1954 (2 & 3 Eliz. 2 c. 56) .

Duration may be a few weeks or up to several years for projects.

• Licence fees may include service charges, utilities, VAT, and business rates .
• Detailed contractual drafting is essential to avoid accidental creation of a lease.

Discover how flexible space upgrades and smart fit‑outs can help owners attract occupiers under licences: Leanspace – Vacant Space Solutions .

Example (Commercial):
A start‑up coffee brand takes a two‑month licence for a vacant shop. The landlord retains rights of inspection. No tenancy arises; the occupier tests the market risk‑free and must vacate once the term expires.

Residential Licence to Occupy – Key Differences

In housing, licences arise in non‑tenancy situations:

• Lodgers sharing with landlords.
• Students in halls.
• Workers in tied housing.
• Residents in sheltered accommodation or care homes.

Residential licensees:

• Pay licence fees, not rent.
• Usually pay council tax directly (or it may be included in the licence fee).
• Have no security of tenure under the Housing Act 1988 (1988 c. 50) .
• Are still protected from unlawful eviction by the Protection from Eviction Act 1977 .

Example (Residential):
A homeowner lets out a spare room to a student who shares the kitchen and bathroom. As facilities are shared and the landlord retains access, the student is a licensee, not a tenant, and must leave on reasonable notice.

Key Legal Distinctions

1. Statutory Protection

• Residential: Limited — no Housing Act rights, only eviction safeguards.
• Commercial: No 1954 Act protection; occupiers must leave once licence ends.

2. Duration

• Residential: Rolling or short‑term, informal.
• Commercial: Flexible, project‑based — weeks to years.

3. Rights & Obligations

• Residential: No subletting, alterations, or exclusive possession.
• Commercial: Complex obligations — insurance, use restrictions, fit‑outs.

4. Financials

• Residential: Licence fee usually covers utilities and council tax obligations.
• Commercial: Licence fee plus VAT, insurance, service charges, and business rates (a key difference).

5. Termination

• Residential: Quicker to recover possession but requires reasonable notice.
• Commercial: Ends strictly on the licence contract terms such as expiry, notice, or break clause.

Legal Risks

• Residential property
• • Risk of misclassification: if the occupier has exclusive possession and pays rent, the “licence” may be treated as a tenancy.
  • Key case: Street v Mountford UKHL 4 ,  courts look at substance, not labels.
  • Consequence: occupier gains full statutory tenant protections.
• Commercial property
• • Poorly drafted licences can trigger disputes over rights of use or financial obligations.
  • Ambiguity may even create an unintended lease.
  • Risk exposure includes hidden liabilities for landlords and occupiers.
• Shared risk
• • Precision in drafting is essential in both sectors.
  • Missteps can lead to costly litigation and loss of control.

Drafting Best Practices

• Specify whether the licence is residential or commercial
• Control exclusive possession with landlord access rights
• Clarify payment terms — licence fee vs service charges vs rates or council tax
• Define duration, termination, and notice periods
• State permitted activities (residential accommodation vs business use)
• Include dispute resolution measures
• Follow lawful eviction procedures ( Protection from Eviction Act 1977 )

Authoritative Resources for Further Guidance

• GOV.UK – Tenancies and licences
• Citizens Advice – Tenancy or licence guidance
• RICS – Lease vs licence practice insights

Final Practical Checklist

For Landlords:

• Avoid granting exclusive possession unless you mean to create a tenancy.
• Draft licences clearly (duration, costs, rights).
• Document financial allocations including service charges, business rates, council tax.
• Remember: unlawful eviction is a crime.

For Occupiers:

• A licence gives temporary use only and may not have substantial security of tenure.
• Budget correctly: council tax for residential, business rates and VAT for commercial.
• Understand termination; licences end quickly, hence plan for exit dates.

To Conclude:

• A commercial licence to occupy is a flexible business tool that can be layered with costs like VAT and business rates, but ends automatically on expiry.
• A residential licence to occupy is primarily for lodgers and short‑stay living, offering simple low‑cost arrangements, but no long‑term certainty.

For a thorough overview, check out  Licence to Occupy: Complete Guide for Commercial Property .