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Licence to Occupy Heads of Terms UK: Full Guide

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Part ofUK Property Law Guide

Written by Brad Askew Solicitor (non-practising)
Brad is on the roll of solicitors of England & Wales but does not hold a practising certificate and does not provide legal advice.
Updated June 2026 · England & Wales
When a business agrees to occupy commercial space without taking a full lease, the arrangement is usually set out in a licence to occupy. Before that licence is drafted and signed, both sides typically agree a short summary of the commercial points first. This summary is called the Heads of Terms. Getting the Heads of Terms right matters because the final licence is almost always built on top of it. If something important is missed at this stage, it becomes harder to negotiate later once solicitors are engaged and costs start to mount. This guide walks through what Heads of Terms for a licence to occupy actually do, what they should cover, where people commonly go wrong, and how to think about the key points before you sit down to agree them. It is aimed at small business owners, landlords, and anyone being asked to sign a short-form occupancy arrangement for the first time.

What this document is

A Heads of Terms document for a licence to occupy is a short, written outline of the main commercial points that the licensor (the party granting occupation) and the licensee (the party taking occupation) have agreed in principle. It is not the licence itself.

Think of it as the scaffolding: it tells whoever drafts the licence what the deal actually is, so the formal document can be prepared quickly and cleanly. Heads of Terms are usually marked 'subject to contract' and stated to be non-binding, apart from specific parts such as confidentiality or exclusivity.

That means neither side is locked in until the full licence is signed, but the document still carries weight commercially because both parties have put their names to it. A licence to occupy is different from a lease: it gives personal permission to use space, not an interest in land, and it is generally easier to end. That distinction shapes what the Heads of Terms need to cover, particularly around exclusivity, duration, and termination rights.

How to use this document

  1. Identify the parties and the space clearly. Write out the full legal names of the licensor and licensee, including company numbers where relevant, and describe the exact area being licensed. A floor plan or annotated photo attached to the Heads of Terms removes ambiguity later. If shared areas such as kitchens, meeting rooms, or parking are included, spell that out now.
  2. Agree the duration and any rolling or break arrangements. Decide the start date, the end date or minimum period, and whether the arrangement will continue on a rolling basis after the initial term. Also capture how much notice either side needs to give to end it. Licences are often short-term, so the notice mechanics matter more than people expect.
  3. Set out the fee and payment terms. Record the licence fee, how often it is paid, what it includes (for example utilities, cleaning, internet, business rates), and how any additional charges are handled. Agree whether VAT is payable on top. If a deposit or advance payment is required, note the amount and the conditions for its return.
  4. Cover use, access, and restrictions. Describe what the licensee is allowed to do in the space and any activities that are not permitted. Agree access hours, whether the licensee can bring in their own equipment, rules on alterations, insurance expectations, and who is responsible for day-to-day repairs and compliance with health and safety obligations.
  5. Flag legal status and next steps. Mark the document 'subject to contract' so it is clear the Heads of Terms are not binding in themselves. Identify who will draft the licence, a target signing date, and any conditions that need to be satisfied first, such as references, board approval, or landlord consent if the licensor is itself a tenant.

Common questions

If you're dealing with this kind of situation, speak to an experienced legal adviser who can walk you through it — from £149.

Common questions

Q Are Heads of Terms for a licence to occupy legally binding?
In most cases they are not intended to be binding, and the document will say so expressly, often using the phrase 'subject to contract'. Certain clauses can still be binding if the parties want them to be, such as confidentiality, exclusivity, or who pays legal costs if the deal falls through. It is sensible to state clearly which parts bind the parties and which do not, to avoid arguments later.
Q What is the difference between a licence to occupy and a lease?
A lease grants an interest in land and usually gives the tenant exclusive possession for a fixed term, often with statutory protections. A licence to occupy is a personal permission to use space, does not grant an interest in land, and is generally easier to bring to an end. Courts look at the substance of the arrangement, not just the label, so drafting needs to match how the space will really be used.
Q Do I need a solicitor to prepare Heads of Terms?
Not always. Many Heads of Terms are negotiated directly between the parties or through a commercial agent. However, if the arrangement is valuable, long, or involves sensitive issues such as exclusivity or signage rights, taking input from someone with commercial property experience before you sign can save significant cost and friction when the full licence is drafted.
Q Can the licensor end a licence to occupy at any time?
It depends entirely on what the Heads of Terms and the final licence say. Some licences allow termination on short notice, others commit both parties to a fixed minimum period. This is one of the most important points to pin down at Heads of Terms stage, because changing the termination mechanics later can be difficult once momentum has built.
Q Should the licence fee include VAT?
That depends on whether the licensor has opted to tax the property for VAT purposes. If they have, VAT will usually be charged on top of the fee. The Heads of Terms should state clearly whether the agreed figure is inclusive or exclusive of VAT, and who bears responsibility for any VAT changes during the term. Getting this wrong can lead to unexpected costs.
Q What happens if the licensee wants to stay longer than agreed?
The Heads of Terms can include an option to extend, a right of first refusal, or simply leave the position open for future negotiation. If nothing is said and the parties carry on after the end date, a new arrangement may arise by conduct, which creates uncertainty. It is cleaner to record up front how any extension would work and on what terms.
Q Can a licence to occupy accidentally become a lease?
Yes, this risk is real. If the licensee is given exclusive possession of a defined space for a fixed term at a rent, a court may decide the arrangement is a lease regardless of what the document is called. That can trigger statutory protections the licensor did not intend. Careful drafting of the Heads of Terms and the licence itself helps manage this risk.
If you're dealing with this kind of situation, speak to an experienced legal adviser who can walk you through it — from £149.

Sources

This guide is based on primary UK law and official guidance.

Brad Askew, Solicitor (non-practising)

Written & reviewed by

Brad Askew Solicitor (non-practising)

Brad is on the roll of solicitors of England & Wales but does not hold a practising certificate and does not provide legal advice. LegalDocuments.co.uk is not a law firm and does not provide regulated legal advice.

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Legal disclaimer
This article is for general information only. It is a tool to help you find your way — not legal advice, and not a substitute for speaking to a qualified adviser about your situation.