Just as we have previously reviewed and analyzed the differences between certain aspects of sharing property rights, landlords and owners are often met with the challenge of whether to enter into lease or a license agreements when allowing businesses or individuals to use their real property. Although these contractual arrangements resemble each other in many structural ways, they have important legal and practical differences that should be considered before choosing one path or the other. Read on for five important differences…
First: What’s the difference?
From a purely legal perspective a lease is a transfer of an actual interest in the real property and/or improvements to the same. A license is a right to use the real estate for a specific purpose where the owner retains the right to revoke the right at its own discretion, although both of these agreements contain contractual rights given to use real property for a particular use and purpose. As most attorneys know, the “bundle of sticks” that represents the fee interest in a piece of real estate is divided up in a lease, but not in a license. Imagine a situation where you give someone the right to one part of your yard to enlarge their garden, versus giving another neighbor the right to store compost in your backyard in the fall.
Second: When do you use each one?
Typically, leases are negotiated with individuals or businesses who the owner of the real property wants to grant rights to use the real estate for a specific period of time, for certain uses and to utilize the improvements on the land in exchange for payment of rent and a share of the costs associated with the ownership of the property including taxes, insurance and common area maintenance costs. Licenses are usually granted to short-term users of the real estate for specific purposes only and the owner retains the right to revoke the license in exchange for a use charge. Obvious examples of leases are shop owners in retail center, businesses making use of office space for commercial operations, and companies desiring long-term use of large buildings for storage, distribution and transport of raw material and manufactured goods. In contrast, a license agreement is usually negotiated with a user of the property for a specific reasons such as storage, accessory use or access.
Third: Why choose a lease over license or vice versa?
In some situations the answer to this question is almost automatic. A grocery anchor in a shopping center will require a lease to provide for operations and full use of the real estate and common area. On the other hand, a typical license agreement is given to temporary users of real property who may need the area to use for a specific purpose. A good example of the latter would be a home and garden store who needs extra space to store lawn maintenance supplies, as well as lumber and other building materials. When the intended use of the real estate and the time period involved are not so clear, the choice of agreement and rights is a bit more difficult to determine. For example, what if the user is tenant who want to store material in an industrial space for final distribution at a later date? This situation requires an analysis of not only what the user/tenant wants but also what the owner’s goals and plans are for the asset. If the property is not for sale or under lender scrutiny, a license may be the answer. However, if the owner wants to keep its options open and/or has a buyer for the property, a short-term lease may be a better solution.
Fourth: Remedies in case folks don’t play nice in the sandbox:
Leases in most states require that the landlord make demand for possession and if necessary file suit for eviction if the tenant does not vacate and/or remove its personal property and fixtures. On the other hand, license agreements if properly drafted will allow for owners to physically remove the occupant and its personal property from the real estate.
So, why use a lease? As discussed above, economic or business reasons may require a lease arrangement to give the tenant rights based on their investment in the real property. If so, the landlord is limited to state law restrictions as to removal. The good news is that most states provide for summary proceedings and other speedy procedures if the tenant goes into default or holds over after the lease term expires. However, tenants as possessors of real property interests have rights that can be protected and exercised as defenses and counterclaims if they are sued for eviction. That may mean hearings, appeals and a long time before the tenant exits the real estate.
On the other hand, even though many states allow for owners to remove licensees and their personal property by self-help if needed, the stand-your-ground-licensee could require a trespass action to be filed if they do not leave. In some states this may require more time and costs to remove them than if they were lessees.
Fifth: So what do you do?
The key to this decision requires a close analysis of many factors, including:
A. The user/tenant’s use;
B. The amount of personal property on site;
C. Clarification of the occupant’s plan for use of the real property;
D. The intended use of the premises in the future by the owner;
E. Lender considerations;
F. Potential sale of the real estate; and
G. What are the occupant’s plans for its business in the future?
As with most situations, there are no clear answers to all scenarios, but hopefully this post has provided some guidance to owners and occupants of commercial properties who wish to do business together in this manner.
All comments, jabs, critiques and war stories invited!