If you are looking for new short-term premises for your business, did you know that there are actually a whole range of legal forms a short-term letting can take?

A formal lease may not be the most appropriate option if the premises are only required for a short period. Given the costs associated with drafting and negotiating a full lease, many landlords and indeed tenants will look to use quicker, and cheaper, options. 

This note sets out the different options available for short-term occupation of business premises and considers the advantages and disadvantages associated with each.

This note considers the following options:

• Leases
• Licences
• Tenancies at will
• Periodic Tenancies
• Flexible working spaces e.g. Co-working/managed space/“plug and play”

Leases

What is a lease?

A lease is the grant of the right to “exclusive possession” of premises for a specified period. This means it is dedicated secure space that can only be occupied by the tenant and usually involves entry by way of a keypad/security preventing others from entering. 

Advantages of a lease

• There are only limited circumstances in which a lease can be terminated
• It records all of the key terms and provides certainty
• Some   leases will provide the tenant with a right to renew at the end of the term (called “security of tenure”) under the Landlord and Tenant Act 1954 (LTA 1954)
• “Break clauses” can be agreed, which allow a tenant and/or a landlord to terminate a lease at a certain point in the term, before the contractual end date of the lease

Disadvantages of a lease

• A lease (even for a short term) tends to be a long document and it takes time to negotiate, which will lead to higher legal costs
• Obligations may be quite wide-ranging with the inevitable liabilities and costs, as the landlord will pass full responsibility for the premises to the tenant (which may include maintenance, repair and decoration obligations)
• Stamp Duty Land Tax (SDLT) may be payable on the lease

Licences to occupy

What is a licence?

A licence grants permission for a licensee to do something on a licensor’s premises. 

Advantages of a licence

• A licence is generally a short document which can be prepared quickly and cheaply
• A licence doesn’t usually include as many obligations as a lease e.g. there are unlikely to be substantial repair and decoration obligations 
• Often, an all-inclusive fee is payable, meaning that the licence fee includes a contribution towards insurance and service charge (rather than there being a complicated service charge regime and insurance provisions, which is more likely in a lease)
• No SDLT is payable

Disadvantages of a licence

• The licensee does not have the same control over the premises as it would have if it were a tenant under a lease, as a licence does not confer exclusive possession (meaning, in theory, other people can use the premises too)
• A licence to occupy falls outside the LTA 1954 and confers no “security of tenure”, so you do not have an automatic right to renew the licence at the end of the term 
• The licensor is likely to have the right to move you to alternative locations at short notice so as to prevent you from obtaining “security of tenure”
• The licence can usually be terminated on short notice 

Tenancies at will

What is a tenancy at will?

A tenancy at will exists where occupation of a premises may be terminated by either party at any time. It may come into existence expressly or via implication (e.g. where a tenant stays in possession of a premises beyond the contractual end date of the lease). It can sometimes be difficult to distinguish a tenancy at will from a licence to occupy.

Advantages of a tenancy at will

• A tenancy at will is a short document and can be prepared quickly and cheaply
• A tenant has an exclusive right to occupy the premises
• There is no SDLT payable
• A tenant can walk away at any time without giving notice to the landlord 

Disadvantages of a tenancy at will

• A tenancy at will falls outside the LTA 1954 and confers no “security of tenure”, so you do not have an automatic right to renew the tenancy 
• The landlord may state that the tenancy has ended and that possession is to be given back immediately, at any point (so this is not a good choice if you need certainty that you can remain in a premises for a certain period of time)
• If not drafted carefully, a tenancy at will can turn into a “periodic tenancy” (please see below), which can have disastrous consequences for the landlord.

Periodic tenancies

What is a periodic tenancy?

This is a tenancy with a term by reference to a period of time (e.g. a certain number of weeks, months, quarters or years), so the tenancy continues week to week/month to month, etc. until it is terminated by notice from the landlord or the tenant. The tenancy may come into existence expressly or via implication, where there is a landlord/tenant relationship and rent is paid by reference to a particular period of time.

Advantages of a periodic tenancy

• A short document (which can be prepared quickly and cheaply) may be used or there may be no document at all
• The rolling nature of the arrangement means renewal costs will not be an issue
• Notice served by the landlord must expire at the end of a relevant period, so possession cannot be demanded immediately
• A periodic tenancy cannot exclude the “security of tenure” provisions of the LTA 1954, so a tenant has a right to request a new lease at the end of the contractual term (subject to the landlord having grounds to oppose that request, in certain circumstances)

Disadvantages of a periodic tenancy

• The landlord may serve notice to terminate and seek to put a new agreement in place

Flexible working spaces

What is a flexible workspace?

Flexible workspaces are usually owned by a ‘co-working’ company – the business then rents offices, desks, or open spaces on a short-term basis. 

Advantages of flexible workspaces

• A short document (usually prepared by the company running the co-working space) may be used to document the arrangement, and there may be little to no ability to negotiate this depending on the type of space (which will keep legal costs down)
• Will likely be very flexible, providing the business with the ability to move around the co-working space when necessary and provide an ability to terminate on short notice (this very much depends on the documentation agreed)
• Fewer overhead costs, as often an all-inclusive fee is payable (which usually includes payment towards all utilities, cleaning and amenities provided in communal spaces)

Disadvantages of flexible workspaces 

• If there is little to no ability to negotiate the document being used, a business may be stuck with provisions that they would rather not sign up to (e.g. paying a portion of costs towards the running of a communal bar, which may never be used!)
• May not have exclusive possession depending on the type of space rented 
• There is no “security of tenure” under the LTA 1954, so there is no automatic right to renew
• If the arrangement is technically a lease and an all-inclusive fee is paid then you may end up paying SDLT on more than just the rent
• Some co-working operators take a security deposit which they retain and mix with their own funds so there may be problems getting the deposit back

Informal arrangements

In instances where an informal arrangement is entered into (perhaps by virtue of a letter or even following verbal communication), one of the above forms of letting is likely to be implied by law. If rent is being paid at regular intervals e.g. once a week, a landlord may have inadvertently created a “periodic tenancy” and given their tenant “security of tenure”. 

Some leases also permit a tenant to share occupation of a premises with a group company. This may be attractive to certain businesses which are starting to expand, and where other group companies already have a lease of a premises. Such arrangements don’t usually need to be documented (so legal costs can be minimised), but certain leases may not allow this arrangement, and legal advice should always be sought on the corporate law/tax implications of group sharing.

On this basis, informal arrangements should be avoided if you are a landlord and approached with caution if you are an occupier.

Which option is best for me?

The answer to this question very much depends on your company’s circumstances, risk profile and financial situation – there is no ‘one size fits all’ approach when it comes to property. The various options and risks outlined above can seem daunting, but even if property is not your company’s main focus, it is important to get the deal right. The consequences for your business of making the wrong decision could prove very costly, so please do not hesitate to contact us if you have any questions or concerns.