Everyone reading this blog is likely familiar with a lease agreement for commercial real estate. However, most people are likely unaware that a landlord may grant use of its commercial real estate to a tenant via a licensing agreement instead of a lease. Whereas a lease grants the tenant a specific legal interest in a piece of real property that can only be revoked by the landlord through the legal process, a license does not actually grant the occupant an interest in the property. The legal relationship between a landlord and tenant that is created pursuant to a lease agreement is entirely distinct from the legal relationship established by a license between the landlord and the licensee.
In general, under a licensing agreement, both the landlord and the licensee give up certain rights they might have with a traditional lease, but they also gain flexibility and gain certain rights not available under a lease. Therefore, it is critical for the property owner to understand when a license agreement will work and when a lease is needed.
A lease provides a tenant with exclusive use of a specific property, usually in exchange for payment of rent, which gives the tenant a vested interest in the real estate. In contrast, a license merely gives the licensee permission to use the property; it does not create and/or vest any interest in the licensee. As a result, the landlord can revoke the license at will and resort to “self help” (e.g., changing locks, removing the licensee’s property from the premises, etc.), and can avoid the eviction process when removing the licensee, thereby saving itself time and money.
License agreements are best suited for properties licensed to short-term users, such as temporary office space, laundry rooms, certain types of storage spaces, pop-up stores and restaurants, and kiosks in shopping malls, and there clearly is a need for such agreements in the right circumstances.
To obtain the benefit of a license agreement, the property owner must ensure that its agreement with its licensee in fact constitutes a license and not a lease and simply deeming the agreement a “license” will not necessarily suffice. Typically, when analyzing whether a written agreement constitutes a lease or a license, courts will look to three factors to determine if the agreement is a license or a lease: i) whether the licensor/landlord can revoke the agreement at will; ii) whether the licensor/owner retains control over the premises; and iii) whether the licensor/owner supplies the essential services needed for the licensee/tenant’s permitted use of the premises. Where the answer to the preceding questions is “yes”, the agreement is a license. Courts have held that purported licenses actually constitute leases where any one or more of the foregoing characteristics is either missing from the agreement altogether or is otherwise not sufficiently vested with the tenant/licensee.
As a rule of thumb, the less control given the licensee, the more likely that the agreement will constitute a license because a license offers no autonomy to the occupant, but instead allows the occupant to render its business services on the premises owned or operated by another, who has supervisory power over the method by which the occupant delivers it services. Nonetheless, the licensor’s retention of control over, for example, the prices charged by the licensee, the times of operation within the licensed space, and even the choice of the licensee’s employees, have not resulted in a lease being deemed a license, as such controls can be found to amount to the standard control a landlord wants over its premises so as to ensure a certain level of quality.
Accordingly, property owners and managers and their attorneys must carefully draft their occupancy agreements to ensure that those agreements line up with the owners’ and occupants’ intentions. Owners will also have to make considered business judgments regarding viability of obtaining licensees who are willing to accept license agreements with “at will” revocation clauses. To attract licensees who are hesitant to invest in building out and improving a space that can be reclaimed at-will, owners may consider creative solutions such as developing new financing incentives or including terms for a set payout to the occupant if the owner decides to cancel the license.