How to be Legally Legit when Renting out your Rooms
As Practice Manager or owner of a medical centre, you may be considering renting your premises or renting out rooms to other medical practitioners, allied health professionals or other health and even beauty related service providers. If this is the case, it is important to consider how to be legally legit as you want to be protected, but you also want the other party protected too.
From a technical legal perspective, there are two options for renting out space, and these two options create different rights, obligations, and benefits – so do you need a Lease or a Licence Agreement that is the question?
Don’t I always need a Lease?
Actually no…
A Lease is an agreement where the property owner, though a (registered) agreement, grants exclusive rights to their property for a specified period in return for the payment of rent.
The important features of a Lease are:
it creates more than a contractual right to enter and use the premises for a particular purpose.
it creates an interest in land, which means a tenant has the right to use the leased premises to the exclusion of all others for a specific time period.
it will run with the land, meaning the rights and promises made in the Lease remain with the land regardless of ownership, i.e. the rights usually pass with the transfer of the land from one owner to another.
So, when would I need a Licence then?
A Licence is when a landlord grants temporary use of their property for a specific purpose to another party through a contract, in return for the payment of rent. Unlike a Lease, a Licence does not give the other party any right to exclusive possession over the premises.
The important features of a Licence include:
Giving permission to enter or use the property of another (i.e. could be exclusive right to use one or two rooms with shared use of the bathrooms and kitchen for example);
Cover a short period of time – a year or two – or ongoing with termination rights;
Most Licences give both landlord and occupier the right to terminate the agreement (usually with a certain amount of notice being required)
Can cover shared areas like bathrooms, kitchens and even reception (where different tenants and your staff will be from time to time).
Same, same but different?
Actually…
There are several differences between a Lease and a Licence.
The most important one for a medical practice that is considering taking on a tenant is that if a tenant defaults on a Lease, the Lease will not necessarily be terminated. Under a Lease, a tenant has some contractual rights to petition the Court to reinstate its Lease, even though it has been terminated by the landlord as a result of the default of the tenant. In general, Courts can offer relief for tenants who can resolve the default, for example, to hold the Lease on foot if payment of the unpaid rent is made. These rights are not applicable to tenants that have a Licence (also known as a Licensee).
Licences usually span a period of time that is relatively short - whereas leases are usually committed to for several years.
Benefits of using a Licence rather than a Lease for the spare room in your medical practice
These days, many practices are opting to use Licences with their tenants because they’re a great way to produce extra revenue, they are more flexible and can be seen as more appealing to service providers who may generally be looking for small office space but don’t want to commit to a full Lease which carries with it extra obligations.
Most Licences give both landlord and occupier the right to terminate the agreement usually within a short period of time such as a number of weeks or a month. This offers flexibility for the landlord and the tenant.
Under a Licence, the licensee usually has no right to renew a Licence. This is convenient for landlords if they want to use the rooms in another way (if you have another doctor join the practice for example).
A Licence Agreement is simpler and can be less expensive to set up. Licensees also don’t need a lot of money upfront to commit to a Licence (for example solicitor fees, rent in advance and deposit), making it more appealing for prospective tenants to a Licence rather than a Lease. Rather than having vacant premises or rooms for a long-time, landlords can always consider a Licence Agreement which can be easier to find tenants for.
Under a Licence, a landlord has the right to enter the property and they can also rent out other parts of the property such as other rooms which can help maximise rental return while still giving the landlord flexibility to use the property themselves. Landlords can also under the terms of a Licence create the right to ask tenants to move to alternative, but comparable, rooms in the same property.
As a landlord offering a Licence you may also offer flexible access to office services and equipment on a pay-as-you-go basis or optional extras for your tenants which can provide value, flexibility and a further stream of income.
If you are considering renting rooms within your medical premises, now you know you have options. Investigate them before you commit either way.
Need help?
To take steps to determine the documentation required specific to your practice, arrange a time to speak with one of our team, who specialise in assisting medical practice owners minimise their risk and optimise their efficiency. You can do that here.