It’s a new year, but we’re still seeing the same increase in Real Estate Litigation matters.
Last month, we discussed buyers and sellers utilizing Purchase Options in Leases and some of the complications that come up in this type of arrangement. This month, we discuss another issue we’ve been seeing: the distinction between a lease, on the one hand, and a license, on the other, which can be a critical issue at the inception of an arrangement between parties as well as the source of protracted litigation.
The first question is, what is a “lease”? This isn’t as simple an answer as one may think. One of our favorite definitions of a lease is this one: a lease is an agreement that creates the relationship of landlord and tenant. However, that definition doesn’t provide very much insight.
Here’s a more helpful definition: A lease grants exclusive possession and use of property to the tenant against the world, including the owner, for consideration, for a definite term, with a reversion to the owner at the end of the term, but does not transfer any title. (10 Miller & Starr, Cal. Real Estate (4th ed. 2022) § 34:1.)
If the lease permits it, a tenant can transfer their entire right to exclusive possession and use of the property, together with the tenant’s obligations under the lease, to another party, which is called an assignment. Or a tenant can transfer a portion of their right to exclusive possession and use of the property, but remain obligated under the lease, which is called a sublease. In that case, the tenant will be a sublandlord or sublessor, and the new tenant will be a subtenant or sublessee. Typically, the lease will provide that the landlord’s consent is required for an assignment or sublease.
Compare that to a “license,” which is a personal privilege to perform a certain act or acts on the property with the permission of the owner. In other words, a license gives an entity or individual permission to use the property for a specific purpose. Critically, unlike a lease, a license does not transfer or convey any interest in real property. Rather, “it merely makes lawful an act that otherwise would constitute a trespass.” (Richardson v. Franc (2015) 233 Cal.App.4th 744, 758-759.)
A key characteristic that distinguishes a lease from a license is that a lease grants a right to exclusive possession of property against all others, including the landowner, whereas a license does not. Thus, whether an agreement for the use of property constitutes a license or a lease generally is determined by “whether the contract gives exclusive possession of the premises against all the world, including the owner, in which case it is a lease, or whether it merely confers a privilege to occupy under the owner, in which case it is a license, and this is a question of law arising out of the construction of the instrument.” (In re Safeguard Self-Storage Trust (9th Cir. 1993) 2 F.3d 967, 972.)
Another key characteristic is that a license is not transferable – it is personal to the licensee. Any attempt to transfer or assign the license terminates the license. Also, it is generally revocable by the licensor at any time, for any reason, even before the expiration of the term, although under certain circumstances a court can, in the furtherance of equity, declare a license to be irrevocable. A lease, on the other hand, unless it provides otherwise, is irrevocable.
Classic examples of a license are granting a neighbor use of a right-of-way or to draw water from a creek. Another example is an arrangement to give a baseball team exclusive use of a stadium on games days that vary during the year, where the owner operates the parking, concessions, and security. The determination of whether an agreement creates a license or a lease can be complex, especially in cases where the arrangement appears to have qualities of both a license and lease, such as the case of an agreement for a party to operate an airport hangar on a property, or a marina. It can be difficult to predict the outcome that a court might reach but generally courts will analyze the language of the relevant agreement, focusing on the concepts described above.
Whether a lease or license is best depends on the circumstances of the proposed arrangement, including, among other facts, the proposed use of the property, the duration of the use, whether the use is exclusive as well as if it is transferable. These are just some of the questions to consider in determining the arrangement that works best for you.