By default, all dnsmasq processes share the same leases file. libvirt
also uses the --dhcp-lease-max option to control the maximum number of
leases allowed. The problem is that libvirt puts in a number equal to
the number of addresses in the range for the one network handled by a
single instance of dnsmasq, but dnsmasq checks the total number of
leases in the file (which could potentially contain many more).

The solution is to tell each instance of dnsmasq to create and use its
own leases file. (/var/lib/libvirt/network/<net-name>.leases).

This file is created by dnsmasq when it starts, but not deleted when
it exists. This is fine when the network is just being stopped, but if
the leases file was left around when a network was undefined, we could
end up with an ever-increasing number of dead files - instead, we
explicitly unlink the leases file when a network is undefined.

Note that Ubuntu carries a patch against an older version of libvirt for this:

hhttps://bugs.launchpad.net/ubuntu/+source/libvirt/+bug/713071
ttp://bazaar.launchpad.net/~serge-hallyn/ubuntu/maverick/libvirt/bugall/revision/109

I was certain I'd also seen discussion of this on libvir-list or
libvirt-users, but couldn't find it.