Property license agreements: not so flexible after all?

read time: 5 mins

With the rapid and sudden increase in the popularity of work from home arrangements over the past four years, many prospective commercial tenants may hesitate to commit to a traditional lease.

Businesses may be reluctant to apportion a lion’s share of their balance sheets to maintaining their own office, only to find it empty most days of the year. Although some organisations have taken the bold decision to eschew the office completely, operating entirely from their employee’s laptops and home offices, it is clear that most still consider that some kind of shared physical working space is necessary for collaboration, culture and training.

This guide highlights solutions available for tenants, along with the risks and considerations that businesses need to be aware of before entering into a property license agreement.

What solutions are available for tenants?

‘Hot-desking’ or ‘co-working space’ solutions can seem attractive to businesses. In this case, license agreements can grant access and use of a certain proportion of space in a larger premises in exchange for a given fee. Further fees will then be payable in exchange for additional amenities, such as meeting rooms and event hosting.

In contrast to a traditional lease, property licenses tend to be for a much shorter term, ranging from as little as three months to two years, and are advertised emphasising their flexibility. They can be secured at short notice by signing a standard document, theoretically eliminating the expensive process of protracted negotiations and legal fees. 

However, this option carries significant risks. Standard license agreements may include onerous clauses which landlords may be reluctant to negotiate away. These clauses have the potential to significantly prejudice licensees’ goals in entering into such agreements in the first place, transforming an apparently flexible and cost-effective solution into a burdensome and costly liability.

Risks for tenants 

In practice, we have encountered a number of clauses in property license agreements which have tripped up licensees, usually surrounding termination.

Licensees may be required to give notice of their intention to terminate from three to six months in advance of the date they intend to leave. This is a requirement which often does not fit well with the agile and flexible businesses to which these agreements are marketed.

Furthermore, a termination clause may require a licensee to carry out a very specific procedure in order to properly and effectively terminate their agreement. The agreement may specify that notice is to be served on a specific person or at a specific address, which is different to the landlord contact, that the licensee is accustomed to dealing with. These service requirements may also not be immediately ascertainable from the agreement itself, incorporating clauses which allow the landlord to change its address for service by notice to the licensee.

Such termination clauses can be very dangerous for a tenant if not properly observed. Failure to properly terminate the agreement will nearly always extend the agreement beyond the initial termination date, and may in some cases result in an automatic renewal. This will extend the licensee’s liability for another full term. In practice we have seen a licensee who, while attempting to move offices, had failed to properly terminate their prior agreement before entering into a new agreement. Following an automatic renewal of their old agreement, they became liable for two sets of fees.

License agreements which are heavily weighted in favour of the landlord also present risks to licensees in the duration of the term. We have seen one agreement in practice, which gave the landlord the right to continue to collect fees even if the licensee’s access to the premises was revoked for breach of the building rules.

If all of the clauses of a license agreement are not properly considered and requirements complied with, businesses may find themselves with a very large liability for a service it does not want, does not need, or in some cases, which is not even being provided. This can be particularly problematic for the kinds of small businesses and start-ups to which license agreements appeal, since they are often not equipped to deal with such a large unexpected liability.

What should businesses consider before entering into a property licence agreement?

Before entering into a property license agreement, always check the termination clauses. In our experience, these are the most likely to trip licensees up.

It’s important to check:

  • The length of the required notice period.
  •  The address and method for service of a notice to terminate.
  • Whether the landlord is entitled to change their address for service.
  • Any provisions dictating a deemed date of service, as this may be a different date than when service is actually enacted.
  • Any provisions dictating the exact wording that is required for service.

It’s essential to carefully review any other clauses governing the rules for your use of the building, any entitlement for the landlord to withdraw access and services for breach of these rules and your liability for fees in the event that access and services are withdrawn. You should be aware that building rules may not be described in full in the body of the agreement. This may be incorporated within a separate handbook or guide the contents, which the landlord may be entitled to update or alter at their discretion.

Depending on the circumstances, your landlord may be open to negotiating certain clauses in its standard agreement. If you are concerned about onerous clauses in a property license agreement your business is already subject to, there are a number of steps you can take to mitigate your liability. If you are encountering problems with termination, you must ensure that all requirements in the license are properly complied with.

Importantly, there isn’t a general rule against unfair terms for contracts between people and organisations acting in the course of business, nor is there a general automatic obligation for parties to contract in good faith. However, depending upon the circumstances in which the license agreement was made, certain particularly onerous clauses may not be enforceable by your landlord.

If this is an area you are interested in discussing further, please don’t hesitate to contact the property disputes team.

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