License Agreement Pros, Cons, and Considerations

What exactly are license agreements and how can they be beneficial to owners? When you sign a lease with a tenant it creates a landlord-tenant relationship that can work in your favor, but also comes with some potential problems. For example, when a tenant defaults on its lease owners usually don’t have the option of terminating the lease immediately. The owner might have to wait a certain period of time for the tenant to “cure”—that is, fix—a violation. If a tenant is no longer useful to the center’s synergy, the owner must wait, sometimes for several years, until the end of the lease term to get rid of it. On the other hand, a license agreement permits the owner to eliminate that relationship—and therefore, the headaches that come with it—almost immediately. Is a license agreement appropriate for you and your prospective tenant? Take these aspects of a license into account when making a decision.

'At-Will' Advantage

There’s a definite distinction between a lease and a license: A lease is a conveyance of exclusive possession of specific property for which the tenant pays rent; a license merely makes the operations of a tenant—technically, a licensee—permissible at the property.

The legal relationship established by a license creates an “owner-licensor” and a “licensee.” One of the major owner-licensor benefits of a license agreement is that it’s revocable at the owner’s will. The licensee has no entitlement to the space it uses.

The owner’s right to revoke the license “at will” is powerful. And if a licensee refuses to leave the space after its license has been revoked, the owner may use so-called “self-help” to remove it without drawn-out litigation to regain possession of the space and rent or license it to another party.  The licensee has no right to possession. (For a recent case in point, see “License Agreement Entitles Owner to Evict,” in this issue.)

Some Risks Remain

A license may seem like an easy solution when a prospective tenant is short term in nature (think holiday mall kiosk), it’s a new concept for your property (think parking lot food truck), or you’re apprehensive about making a commitment to it (think start-up small business). But be aware that the use of a license agreement, instead of a lease, will not entirely eliminate all possibility of litigation between you and your licensee. If you end up having to use self-help, the licensee could argue that your actions were “forcible,” making it illegal. And that can lead to litigation. What’s the upside? You won’t be required to re-admit the licensee, even if the self-help used is found to have been forcible. And during any litigation, you’re free to lease or re-license the space to another tenant, rather than lose rent.

Meet Three Criteria

Although licenses require less commitment than leases, owners still must take them as seriously. You’ll have to ensure that the license agreement with the prospective user of the premises meets all the criteria necessary to make it a license and not a lease. Watch out: Simply calling the agreement a “license” won’t make it one.

Whether an agreement is a license and not a lease will depend on whether it has three essential clauses:

• A clause allowing you as the licensor to revoke the agreement “at will”;
• A clause stating that you retain absolute control over the premises; and
• A clause specifying that it’s your responsibility to supply the licensee with all of the essential services required for its permitted use of your premises.

Be detailed when drafting your license agreement. Courts have found licenses to be leases where any one or more of these characteristics is missing from the agreement. However, the less control given the licensee, the more likely the agreement is actually a license. That’s because a license offers no independence to the licensee; it merely allows the licensee to render its services at your property and under your supervision over its operations.

However, courts have sometimes held that even when an owner has controlled significant aspects of the licensee’s business, such as prices, times of operation, and hiring decisions, there’s no guarantee that the agreement will be deemed a license and not a lease. After all, savvy owners negotiate those controls in their leases with tenants.

You should work closely with your attorney to carefully draft a license agreement so that you can take advantage of the benefits it offers. But first you’ll need a prospective licensee that’s interested in setting up shop in your space. There are some types of prospective tenants that typically would be better served by a license agreement than a lease, but you’re not strictly limited to using license agreements with just kiosks or vendors that want to use your outdoor areas. Ask yourself whether a prospective tenant would agree to a license—with the “at will” revocation clause that’s in your favor. Consider offering this option to any kind of short-term, possibly short-lived, or unusual user.