Letting Go of Leases and Allowing Licenses

By: Adam Leitman Bailey & Dov Treiman

May 1st, 2005

Why Licenses?

Inevitably, when courts seek to readjust the balance between landowners and non-owner occupants, owners’ counsel will reach into the ancient common-law toolbox to find occupancy arrangements that give owners the panoply of rights and remedies they thought they enjoyed as landlords. In the movie Jurassic Park, it is observed that nature will find a way. So, while the dinosaurs on the island are all female, they find a way to reproduce. Similarly, when so many judges appear determined to remove landowners’ rights, owners will find a way to assert them. Some properties are so uniquely situated or configured that unless the landlord has extraordinary levels of control, the property’s profitability may be doomed. Since many courts are antagonistic to such levels of control in ordinary leasing arrangements, creativity is often required.

For institutional landlords dealing with large corporate tenants, the answer lies in careful lease crafting. And inevitably, both sides of the negotiating table will share responsibility for problems in interpretation that will undoubtedly arise.1

However, for smaller businesses, particularly startups, the old-fashioned license may be perfect for shared spaces, office suites, and for other types of commercial occupancy. And these arrangements give owners considerable latitude. By way of example, typically, a landlord will develop something such as a loft building by licensing each floor to five different businesses, where each occupant has its own space but all share an elevator and kitchen. These landlords give the occupants special access
cards to gain entry to their space, each of which is pre-built. Some supply basic furniture. Others do not. This obviously factors into the rents that may be charged. Technology allows “turn key” control for owners if a licensee fails to pay the licensee fee or otherwise defaults.2 Also, owners may use technology to control and charge for extra services such as copies, faxes, kitchens, conference room use, and communications equipment.3 Much of this could also be encompassed within a lease agreement. But when self help is being utilized, courts clearly favor license agreements over traditional leases.4 Although lease clauses permitting self help have been enforced, attorneys should be aware of the possibility of a court reinstating the tenant while litigation continues. By contrast, with license agreements, licensees may sue for damages incurred due to an unlawful eviction, but courts will almost never restore the licensee to possession.

What is “self help”? It is an odd name, really. Simply, it means locking an occupant out of the premises without court process.

Benefits of a License Agreement

By entering a license agreement instead of a traditional lease, the landlord may be able to:
(a) utilize self help in the event of a default;
(b) avoid landlord-tenant proceedings, thereby saving both the time and money that would otherwise
be associated with such litigation;
(c) avoid having the court put the licensee back in the space while the case is being litigated;
(d) earn additional revenue by charging for features found in the premises; and
(e) offer commercial space in areas that are considered less than prime precisely because the occupants are optimistic that once their business takes off, they will be able to leave these less luxurious surroundings to go into the “big time” without being burdened by having to serve out the balance of the fixed lease-term.

Disadvantages of a License Agreement

Just as landowners can make the licensee come and go at will, the licensee may also leave at will. This flexibility comes at a price. The landlord may be deprived of a reasonably steady income flow and may, in extreme circumstances, see a vacancy rate high enough to drive the building into a negative cash flow status. In fact, if a licensee who plans on staying smells weakness in the landlord’s negotiating position as the vacancy rate climbs, the licensee can demand reductions in the licensing fees, thereby further undermining the building’s financial stability. Lenders are also more willing to lend against a
“tenanted” building than one filled with “licensees.”

A license is attractive for a startup business because in the event of a failure, its principals will not be stuck with years of rent due. However, as soon as that business shows success, it is going to want the stability of a lease. Therefore, owners may well find that this tremendous churning in the building’s occupancy also destabilizes the building’s financials.

Marketing of a “terminable-at-will” license agreement may be extremely difficult if the property owner is competing with other landlords for occupants. Typically, occupants want to know that they will have use of a delineated space without interruption for a certain amount of time. The amount of notice that will be required to terminate the license agreement may also be a deal-breaker when negotiating the license.

How Does One Obtain the Benefits of a License?

Many spaces that are the subject of a lease agreement could be the subject of license agreement, affording building owners more control and leverage over the tenancy. But many spaces cannot fit into the license mold in view of all the accompanying limitations and requirements.

The Difference Between a Lease and a License

A lease is a conveyance of exclusive possession of specific property. A license merely makes permissible certain acts on another’s property that would not otherwise be permissible. Case law deals more with what does not constitute a license, rather than what it is. However, the hallmark of a license is the nonexclusivity of possession. Thus, one way to mark a license as a true license is to include a provision that the landlord can relocate the licensee to a different portion of the premises, at will. While the landlord may never actually exercise this right, the fact that the right exists will help define the agreement as a license rather than a lease. To this end, it is useful for the license to include a floor plan which shows the initial space designated under the license, with a provision that if the space should change, a different floor plan will be annexed to the agreement to reflect the modification. An owner with a taste for it may use photographs instead of floor plans.5

Having The Agreement Terminate at Will

One factor that distinguishes a license from a lease turns on whether the drafted agreement contains a clause allowing for revocability at will. Courts have held that documents “called” license agreements were actually leases merely because the document only allowed the agreement to be terminated for cause.6 They reason that when one party’s interest in another’s real property exists for a fixed term and is not revocable at will, a landlord-tenant relationship has been created. Therefore, an at-will termination clause is another condition a careful owner’s counsel will insist on seeing in any license agreement. Of course, this presents a marketability issue and owners should feel free to assure licensees that as a businessperson, the landowner would be unlikely to terminate the license on a “whim,” since that would negatively impact the building’s income. However, the owner should not go on to say that there would have to be a reason to terminate the license. That would mean that one of the license’s terms is that it could only be terminated for cause and the owner faces the problem of fraud charges if it is not true, or a finding that the agreement is really a lease if it is true. So, the owner really has to restrict comments to saying that it would be bad business to terminate the license on a “whim.”7

Restricting the Amount of Control Given the Licensee

Much of what distinguishes a license from a lease turns on the amount of control the licensor has granted to the licensee.8 The less control given the licensee, the more likely the agreement will be considered a license. Owner’s counsel should therefore avoid anything that appears to transfer absolute control and possession to the licensee. Owners will also want to limit in some way the granting of access to the space. For example, wise owners avoid having a licensee have control over areas in which the licensee does not conduct permitted activities. For similar reasons, the owner may wish to grant the licensee less than absolute twenty-four hour access to the space. Prudent owners do not give licensees control of keys and locks to the space’s entrance ways. Finally, in order to preserve the definition of license, the owner should retain the right to enter the licensed space for more than just emergencies.9

Sometimes “More” Really Is “Less”

Another factor in distinguishing licenses from leases is the degree to which the licensor provides the licensee with services. Property owners seeking to preserve license status should bear the expense of installing computer networks and cabling, major office equipment, and telephone and electrical wiring within the space. Owners should also provide services such as facsimile,10 copier, and kitchen use if available, and should limit the licensor’s power to install its own sophisticated electronic equipment within the licensed space. This limiting of the licensor’s rights—and the owner’s retention of these rights—will reinforce the agreement’s status as a license.

Assignment or Transfer of the Space

Owners should prohibit the licensee from transferring any interest in the licensed space.11 The License Agreement should therefore be automatically terminated12 upon the licensor selling or transferring all or any part of its interest in the space to a third party. Similarly, owners should provide that the license will terminate automatically if the licensee engages in a bulk sale, or if greater than a 50% interest in the licensee’s business is transferred to another party, whether corporate or individual.

In the world of leasing, transfer of all (or even a part) of the stock of a corporation can be considered a forbidden assignment13 and there is no reason a properly worded license agreement cannot contain the same language.

A License by Any Other Name May Not Smell As Sweet

In order for the courts to deem an agreement to be a license, it should be called a “license” or “occupancy agreement” and not a “lease”. While the courts do not consider themselves bound by the name,14 whether it is called a license or a lease, the moniker has some persuasive value in litigation. So, if an owner is going to the trouble of creating a license, it should say that that is what it is (or, at least, that is what was intended).15

And, Finally?

We do not mean to imply that licenses are the one-size-fits-all solution for today’s marketplace. They are really only meant for landlords who are filling smaller or marginal spaces and places such as office suites whereby the landlord is not giving up total control of the tenancy and will be managing the space daily. Such property owners—and their licensees—will be limited to those who appreciate the benefits of greater flexibility and independence from the court system and who are willing to endure the financial risks and instability inherent in their use. For the right landlord, the license agreement may be the best revival of anything since that guy at Jurassic Park made dinosaurs.16

………………..

Endnotes:

1 In this regard, we commend to the reader’s amusement the many cases centered around 666 Fifth Avenue. These leases have been found ill crafted as a matter of law. However, since there were attorneys on both sides of the process, the leases are not construed against the landlord. Instead the courts are constrained to apply the dictum of the immortal Rachel Treiman: “When in danger, when in doubt, run in circles, scream and shout.” In Executive Office Network, Ltd. v. 666 Fifth Ave. LP, 30 HCR 276A, 294 AD2d 166, 742 NYS2d 36, NYLJ 5/16/02, 18:1, HCR Serial #00013172 (AD1 Williams; Tom, Saxe, Rubin, Friedman), the court wrote: While each party’s interpretation finds support in various lease provisions, they simply cannot be harmonized. Thus, the agreement is ambiguous, and extrinsic evidence should have been considered in order to establish its meaning.
The record before us is insufficient to permit resolution of the parties’ intent. Industry custom affords no assistance where it is unclear whether the intention was to follow it or to depart from it. The custom of providing for base rent and, separately, for additional rent has already been noted. Finally, the respective affidavits concerning lease negotiations are cursory and serve only to raise questions of fact.
In Citibank v. 666 Fifth Ave. LP, 31 HCR 722B, 2 AD3d 331, 769 NYS2d 268, NYLJ 12/26/03, 26:4, HCR Serial #00014082 (AD1 Nardelli; Saxe, Rosenberger, Williams), the court wrote:
The lease provisions at issue, respecting the effect of real estate tax decreases on the rent paid by plaintiff lessee to defendant landlord, were properly found ambiguous (see, Exec. Off. Network, Ltd. v. 666 Fifth Ave. Ltd. Partnership,
294 AD2d 166, 742 NYS2d 36). The ambiguities are not, however, to be construed against defendant by reason of its having drafted the initial version of the leases, since the lease agreements ultimately entered into resulted from extensive negotiations in which both parties, each a commercially sophisticated entity, were represented by counsel, and plaintiff failed to show that it “had no voice in the selection of [the leases’] language” (67 Wall St. Co. v. Franklin Natl. Bank, 37 NY2d 245, 249, 333 NE2d 184, 371 NYS2d 915).
2 That is a key concept. Licensees do not pay rent. They pay a licensee fee. If there is litigation, the occupants will often try to claim that they are tenants. On their side is the legal doctrine that a court is not bound to regard an agreement by the name that the parties choose for it, but will look to the root of what the arrangement actually represents. But while names are not determinative, they can be ammunition in the analysis. Therefore, landlord’s counsel should be meticulous never tomuse the word “rent,” for only landlord-tenant relationships have rent. It must consistently be called a “licensee fee.” Many, of course, will notice that this means that the landlord cannot bring a nonpayment proceeding under RPAPL § 711(2). Yet
to many practitioners this is a small price to pay for the greater owner rights possessed by a licensor compared to a traditional landlord.
3 Without, of course, the ability to characterize these as “additional rent” for the purposes of summary proceedings.
4 License agreements can be particularly attractive for small spaces where sharing allows tenants to pool the expenses of copiers, fax machines, kitchens, and conference rooms. In some settings, even clerical and secretarial staff can be included in the license. Landlords with these kinds of spaces may have find that license agreements are just what it takes to turn these sows’ ears into silk purses. In doing so, they can save thousands of dollars and years of court battles. The kinds of questions typical in lease litigation– such as whether a sign must be removed, a leak makes the premises unworkable, or whether the process server delivered proper legal notices to an employee or a customer of the tenant–rarely crops up in license litigation.
For an example of the kind of wasteful lease litigation that ties things up for years on end, we refer the reader to www.alblawfirm.staging.wpengine.com, “News and Appearances,” Candy World. If ever there were an argument in favor of the simplicity of licenses as opposed to the complexity of leases, that case is it.
5 Diagrams and pictures, while not the most common form of description of demised premises, whether by lease or license, are still recognized as useful. See, 25 West 43rd St. Co. v. Sioris, 22 HCR 701B, NYLJ 12/8/94, 28:1 (AT1 Miller; McCooe, Glen) HCR Serial #00007258. In the kinds of licenses we are describing in this article, however, they are virtually irreplaceable.
12 Landlord-Tenant Monthly May 2005 Copyright 2005 by Treiman Publications Corp. Any reproduction is strictly prohibited. For more information call 1-800-338-5262 (Letting Go of Leases, continued from page 11)
6 What the parties choose to call an agreement, while indicative of the agreement’s true nature, is by no means binding. As the court wrote in Metered Appliances, Inc. v. St. Marks Housing Assocs. LP, 33 HCR —, 6 Misc3d 1029(A), NYLJ 3/16/05, 20:1, HCR Serial #00014 (Sup Kings Rivera): They also raise an issue of fact regarding whether the lease agreements are enforceable. Defendants’ contention that the leases violate General Obligations Law §5-903, turns on whether the agreements are properly deemed to be leases or licenses. It is the intent of the parties and not the language of the leases which should control the analysis (Linro Equipment Corp. v. Westage Tower Associates, 233 AD2d 824 [3rd Dept. 1996]; see also, Sebco Laundry Systems, Inc. v. Oakwood Terrace Housing Corp., 277 AD2d 303 [2nd Dept. 2003]).
7 Courts have held that a purported license which is not terminable at will, but only for cause and is for a fixed period, is in reality a lease. American Jewish Theatre, Inc. v. Roundabout Theatre Co., Inc., 22 HCR 244B, NYLJ 4/25/94, 26:1 (AD1 Sullivan; Carro, Wallach, Kupferman, Ross) HCR Serial #00001151; Board of Mgrs. Of Builders Apt. Corp. Condo v. Caruso, 23 HCR 577A, NYLJ 9/27/95, 29:4 (Civ Kings Greenbaum) HCR Serial #00007832.
8 The transfer of absolute control and possession is the hallmark of a lease as opposed to a license. Zemach Corp v. John, 29 HCR 62A, NYLJ 2/2/01, 26:1, HCR Serial #00012382 (AT1 Parness; McCooe,Davis)
9 Id.
10 Does anybody ever really call it “facsimile” anymore? Do folks even know what a facsimile is and is it proper to discuss it in polite company? Let’s face it. The real term is “fax.” Anyone who thinks to the contrary should just get over it. And let’s face it, it’s a lot more fun to fax someone than to facsimile him, although faxing of complete strangers without appropriate latex precautions is never a good idea. Finally, in the end, which is a good place to have things be final, it is always wise to remember what Joe Friday said to his secretary when asked if he wanted both the snail mail and the fax, “Just the fax, ma’am.” You knew you were not going to get away without our using that one. Fess up.
11 Because of the transient nature of the occupancy in the first place, the owner will want to maintain full control over that very transience.
12 Again, we must caution that a written license agreement must call for termination “at will” in order to preserve its character as a license. So, when crafting termination “for cause,” exercise caution so as to make it clear that cause is sufficient for the termination, but not required.
13 Barnes v. Raikelson, NYLJ 6/20/90, 27:1, 18 HCR 319B (AT 2 & 11 Kassoff; Pizzuto, Santucci); Dennis’ Natural Mini-Meals, Inc. v. 91 Fifth Ave. Corp., NYLJ 4/22/91, 23:1, 19 HCR 230A (AD1 Sullivan; Wallach, Kupferman, Kassal); The Cigno Revocable Trust v. Palummo Bros., Inc. et ano, NYLJ 7/25/91, 25:2, 19 HCR 456A (AT 2 & 11 Monteleone; Pizzuto, Williams); Francis Lewis Assocs. v. Beer Barrel Distributors, Inc., .21 HCR 214A, NYLJ 5/7/93, 32:3 (AT 2 & 11 Kassoff; Aronin, Scholnick) HCR Serial #00000529.
14 See note 6, above, or Metered Appliances, supra if you are feeling hoity toity.
15 Keeping in mind that courts will look behind agreements to what they really are and not be bound by the labels that parties put on them.
16 At this point in the article, Mr. Bailey sought to introduce a wholly gratuitous reference to Mr. Treiman’s life partner, Mr. Antonovich. However, when in his editorial capacity, Mr. Antonovich reviewed the article, he demanded that he in no way be associated with this article. You are therefore directed to disregard this note.