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There are unique complexities, and risks, associated with entering into a licence agreement.

What is a licence agreement?

Sometimes unusual access to a property is required before or after settlement, or in other circumstances. This occurs via a licence agreement.

A licence agreement is a separate legal agreement, between the vendor and the purchaser, for special access to the property either before or after the settlement date. This may be required if the purchaser wishes to move in prior to the settlement date (assuming the property will be vacant), or the vendor wishes to stay on for a period of time after the settlement date (assuming their new home won't be ready on settlement day).

Licence agreements also tend to be used if settlement fails to occur due to the vendor's fault, the purchaser urgently needs to move into the property or they will be homeless, and the vendor is legally required to mitigate losses they cause.

In older subdivisions, car parks and outdoor courtyard areas tend to be common property. In order to ensure exclusive use by the adjacent property owner, a licence agreement (or long lease) can be provided by the Owners Corporation.

Licence agreements have particular legal characteristics that make them very different to a lease or Residential Tenancies Agreement. The occupant of the property under a licence agreement (the licensee) can't alter the property in any way - no renovations, no banging picture hooks into walls, and no major gardening.

The licensee is also legally responsible for the risk in the property, which means they must take out and maintain their own building and public liability insurance policy, and they must prove this by providing the vendor with an insurance Certificate of Currency before they commence occupation. The licensee also takes the property as is upon occupation, which means if the purchaser moves in earlier than the settlement date, they forfeit their final pre-settlement inspection.

The fee paid by the licensee is called the licence fee (not rent) and is usually calculated weekly and paid on settlement day, as an additional lump sum added onto (or subtracted from) the total amount payable by the purchaser. If it's an urgent licence agreement due to the vendor's failure to settle, the licence fee is often $1 in total, payable upon demand, to satisfy the legal requirement of consideration. The licensee is also usually responsible for Council rates, water charges and, if applicable, land tax and Owners Corporation fees from the date of occupation until settlement day. This is also calculated as a lump sum amount, factored into the final settlement figures.

The main risk with licence agreements is that the contract for the sale of the property is terminated (because, for example, the purchaser failed to obtain finance) and the licensee must be evicted. But the licensor (the person who granted the licence) won't have any rights to do so under Residential Tenancies laws. This can make evicting an licensee under a licence agreement extremely difficult.

The preparation, negotiation, explanation and finalisation of a licence agreement is not part of the normal conveyancing process and workflow. That's why it usually involves additional legal costs, because it's not priced in to fixed fees charged for conveyancing. If a purchaser requests a licence agreement prior to settlement (and the vendor is not at fault), then the vendor's lawyer/conveyancer can require their legal costs for the licence agreement to be paid by the purchaser at settlement. This is in addition to the additional legal costs payable to the purchaser's lawyer/conveyancer.

Note: the above is general information and should not be considered as legal advice.

Photo via Freepik

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