License v. Lease: When to Use a License Rather Than a Lease

CRE owners should be aware of situations in which a license agreement may prove to be more beneficial than a leasehold interest. The key factors that distinguish a license from a lease are the ability to revoke the licensees’ use at will, and the degree of control that the property owner maintains over the licensed premises. As a result, licenses are frequently used in parking lot businesses, retail kiosks, in agreements to render services within a property, and other scenarios where the use of the property is temporary, or the ability to terminate more easily than a leasehold is envisioned or needed, and where the licensee does not retain exclusive use and control of the premises.

Termination and Recovery of Premises

Since a license agreement conveys no property interest to the licensee, the ability to terminate the agreement at will may, in certain situations, prove to be an advantage over a lease both in terms of time and costs as compared to the process for termination of a leasehold interest.

A lessor generally does not have the option to terminate a lease immediately upon the lessee’s default, and must comply with the lawful process of the governing jurisdiction in order to regain possession of the premises.

However, in situations where the parties have made a valid agreement for a license for a definite period, the revocation of that license will give rise to an action for breach of contract.

Courts May Look Beyond the Language of the Document

In drafting a license bear in mind that courts will look past the designation of an agreement as a license or a lease.

A license must be carefully drafted to reflect the intent of the parties to enter into a licensing relationship. As noted by Sujata Yalamanchili, a partner in the New York firm of Hodgson Russ, “Courts look at these agreements very carefully and may look past terminology, so the drafter must be careful in situations that could be perceived as granting a property interest.”

Care should be taken when a license is executed in conjunction with other business and commercial property transactions to be sure that the characterization of a document as a license or lease is consistent with references to other business and real estate documents. These include an agreement to provide services to the premises, or as a temporary use preceding completion of a buildout for a leased property. A court will examine the whole of the document and look at the related documents of a broader transaction.

Example #1: In a recent New York case a garage management company sought relief, including a Yellowstone injunction and monetary damages, based on the owner’s termination of the parties’ Garage Management Agreement. The court rejected the management company’s claim that the management agreement granted a lease to the subject premises on the grounds that the agreement granted neither exclusive possession nor absolute control of the premises, and expressly stated that the agreement provided the management company with “no real property interest, “and as such was a license not a lease.”

The court noted that since the management agreement was a license for a defined, 10-year term, the revocation of the license gives rise to a potential breach of contract on behalf of the licensee. However, in a subsequent case between the parties, the court addressed cross-motions for summary judgment, and declined to decide on the management company’s claim for breach of contract pending appeal of the decision described above [Quik Park W. 57 LLC v. Bridgewater Operating Corp., June 2015; see also Quik Park W. 57 LLC v. Bridgewater Operating Corp., March 2016].

Example #2: Another recent New York case involving a license relating to a broader transaction illustrates a court’s review of the related documents. There, the parties executed a number of documents simultaneously in connection with the sale of a pharmacy business. The documents included one identified as a “license,” a lease to other premises, an Asset Purchase Agreement, and Services Agreements.

The decision recounted the findings and ruling of an earlier court, which had rejected the plaintiff’s claim that the document labeled as a “license” was intended as a lease subject to the completion of a buildout of the separately leased property. The court held that it was clear by a plain reading of the license, the lease, and the closing of title to the pharmacy, that the plaintiff’s occupancy of the licensed premises was intended to be temporary.

In the claims before it, the court dismissed the licensee’s claims for damages invoking the doctrine of collateral estoppel on the basis of the earlier court’s ruling and the plaintiff’s pending appeal. It should also be noted that the damages claim was based in part on the licensor’s refusal to provide services to the licensed premises.

In two cases where documents designated “licenses” were unsuccessfully challenged by the licensees as a lease relationship, the courts looked at the documents, noting the express language relating to:

• The Grant of a License for a Specific Purpose;
• The lack of Intent to Convey a Property Interest to the licensee;
• The Intent that Licensor maintain control over the premises [Atlantic Heights Specialty Script Corp v. Downstate at Lich Holding Company, Inc., March 2016].

Practical Pointer: Language in a license specifying the limited use and control over the premises to be exercised by the licensee and/or the control retained by the licensor may help to counter claims that the licensee exercised exclusive use and control.

Example #3: In another recent decision, an appeals court rejected the claim that an outdoor advertising agreement, labeled a “sublease,” was actually a non-assignable licensing agreement as a matter of law. The court found that the language of the agreement “unambiguously” granted the sublease exclusive possession of the property [Z. Justin Mgt. Co., Inc. v. Metro Outdoor, LLC, March 2016]

Key Distinctions Between a License and a Lease

• A license is a revocable privilege to do one or more acts of a temporary nature. It is not a property interest and is revocable at will. In contrast, a lease grants an exclusive right to use and occupy the premises.
• The licensor maintains a degree of control over the premises. In contrast, a lease grants exclusive use and possession of the premises.