Leases or Licenses ' Does a Label Matter?

Attorneys representing property owners are often requested to document arrangements for very short-term and temporary usage of property. “I
don't want a lease; just a license agreement will be fine,” is the frequent form of the request. Assuming that the client's request is not merely an attempt to keep the legal fees down, is such a request one that makes sense from an owner's point of view? More important, can a careful attorney respond positively?

Various reported decisions in New York suggest that while there might be support for abbreviated documentation, use of license terminology may inadvertently create many other unanticipated difficulties for unwary property owners and their attorneys. In other words: “Be careful what you wish for.”

No Distinction

In general, black-letter law does not recognize a distinction between leases and documents or arrangements termed limited “license” or “use” arrangements based solely on how they are designated or labeled by the parties or the draftsman. As long as there is an agreement that clearly defines the area given over to the control of the tenant and specifies the period of time for which such control is provided (the time period of which need not necessarily be fixed in advance), courts have found the arrangement to constitute a lease. As such, the relationship is entitled to all of the protections for landlord and tenant that the relationship implies. See, e.g., Slutzky v. Cuomo, 114 A.D.2d 116, 498 N.Y.S.2d 550 (3rd Dept. 1986), appeal dismissed, 68 NY2d 663, 505 N.Y.S.2d 1027 (1986); Statement Inc. v. Pilgrim's Landing Inc., 49 A.D.2d 28, 370 N.Y.S.2d 970 (4th Dept. 1975).

This is a reality that the landlord/property owner may not like because it requires conformance to such things as a warranty of habitability and may, under some circumstances, risk characterization as a form of protected tenancy. Tenants, for their part, may not like the implied obligations imposed on lease tenants in terms of required notice to terminate, obligations to maintain and protect the property, and the like.

These may include a general obligation to repair, to prevent damage by third parties, to remove dangerous defects from the property, see, e.g., Zito v. 241 Church Street Corp., 223 A.D.2d 353, 636 N.Y.S.2d 40 (1st Dept. 1996), or the implied duty to surrender the premises in the same or better condition as they were found at the start of occupancy.

Licenses vs. Leases

At the same time, as cases have imposed on unsuspecting parties the regimen of leases, the law has consistently and repeatedly recognized the ability of parties to create a license, which is not a grant of property or possessory rights. Licenses are distinguished from leases in that they are not a grant but merely temporary permission for a specified purpose. One writer has gone so far as to suggest that the use of the license form replace property leasing entirely. (Bailey and Desiderio, “Commercial Property: Landlords May Entirely Eliminate Leasing,” New York Law Journal, April 13, 2005.)

There are, however, risks in the use of the language and form of licenses for owners that should be considered before an effort is made to place items under the license label or format. In the first place, licenses are not automatically subject to the Statute of Frauds and, thus, arguably might be created without the formality of a written statement. The protections afforded by the writing requirement are thereby lost to property owners; even a casual conversation or perhaps an exchange of e-mail messages might give rise to property use rights as a licensee.

In addition, even though RPAPL '713(7) specifically contemplates the possibility of a resort to summary proceedings to remove an offending licensee, the imposition of various procedural requirements might complicate the matter for the owner. In a rent-stabilization context, see, e.g., ATM One LLV v. Landaverde, 2 N.Y.3d 472, 779 N.Y.S.2d 808 (2004). Faced with such complications, landlord/owners might not be willing to avail themselves of the right to self-help even though it is protected in such circumstances and proceedings are not actually necessary. P. & A. Bros. v. City, 184 A.D.2d 267, 585 N.Y.S.2d 335 (1st Dept 1992).

Further Difficulties

Other complications for both owners and occupants may result from attempted use of the license construct. On the one hand, the usual restrictions against exoneration for negligence contained in General Obligations Law ' 5-321 are not applicable to licenses as they are to leases. Karp v. Federated Dept Stores Inc., 301 A.D.2d 574, 754 N.Y.S.2d 27 (2d Dept 2003); Brown v. Town of Clarence, 181 A.D.2d 1055, 582 N.Y.S.2d 315 (4th Dept. 1992). Real estate management has traditionally managed to avoid the unintended results of that preclusion in leasing arrangements by resort to indemnification and reimbursement provisions. Property insurance is written in contemplation of such contractual provisions. Would efforts to characterize occupancy arrangements as licenses rather than leases disturb those arrangements and the protective insurance?

One recent lower court case suggests another possible difficulty related to a statutory provision in the General Obligations Law, '5-903. In Harlen Housing Associates v. Metered Appliances, Inc., 19 Misc 3d 1101 (Civil NY Co. 2008, Scarpulla, J.), the landlord and a laundry concessionaire disputed whether their 10-year arrangement was a lease or a license. (Curiously, it is in the area of laundry facilities in larger buildings that many similar cases appear to have arisen.) The language of the written document commencing the arrangement appeared unequivocal in creating a lease, renewable for an additional 10-year period. In the course of the protracted litigation, landlord raised the specter of the provisions of New York General Obligations Law '5-903 that require special notice from the “service provider” of any automatic renewal of a contract. The provision is not applicable to leases, however, said the court.

Conclusion

Given all of the resulting uncertainty, including the likelihood that insurance on the building is probably already in place based on the expectation of leased space, owners' expression of the need for simplicity by way of the “license” route should not be the subject of attorney/draftsmen compliance. Better to develop a sufficiently short form of “temporary lease” with enough of the critical provisions or incorporation by reference of relevant statutory provisions.

Lawrence A. Kobrin is senior counsel to Cahill Gordon & Reindel LLP. Aryeh Haselkorn, an associate, and Aryeh Pomerantz, a summer associate, assisted in the writing of this article.

Attorneys representing property owners are often requested to document arrangements for very short-term and temporary usage of property. “I
don't want a lease; just a license agreement will be fine,” is the frequent form of the request. Assuming that the client's request is not merely an attempt to keep the legal fees down, is such a request one that makes sense from an owner's point of view? More important, can a careful attorney respond positively?

Various reported decisions in New York suggest that while there might be support for abbreviated documentation, use of license terminology may inadvertently create many other unanticipated difficulties for unwary property owners and their attorneys. In other words: “Be careful what you wish for.”

No Distinction

In general, black-letter law does not recognize a distinction between leases and documents or arrangements termed limited “license” or “use” arrangements based solely on how they are designated or labeled by the parties or the draftsman. As long as there is an agreement that clearly defines the area given over to the control of the tenant and specifies the period of time for which such control is provided (the time period of which need not necessarily be fixed in advance), courts have found the arrangement to constitute a lease. As such, the relationship is entitled to all of the protections for landlord and tenant that the relationship implies. See, e.g., Slutzky v. Cuomo , 114 A.D.2d 116, 498 N.Y.S.2d 550 (3rd Dept. 1986), appeal dismissed, 68 NY2d 663, 505 N.Y.S.2d 1027 (1986); Statement Inc. v. Pilgrim's Landing Inc. , 49 A.D.2d 28, 370 N.Y.S.2d 970 (4th Dept. 1975).

This is a reality that the landlord/property owner may not like because it requires conformance to such things as a warranty of habitability and may, under some circumstances, risk characterization as a form of protected tenancy. Tenants, for their part, may not like the implied obligations imposed on lease tenants in terms of required notice to terminate, obligations to maintain and protect the property, and the like.

These may include a general obligation to repair, to prevent damage by third parties, to remove dangerous defects from the property, see, e.g., Zito v. 241 Church Street Corp., 223 A.D.2d 353, 636 N.Y.S.2d 40 (1st Dept. 1996), or the implied duty to surrender the premises in the same or better condition as they were found at the start of occupancy.

Licenses vs. Leases

At the same time, as cases have imposed on unsuspecting parties the regimen of leases, the law has consistently and repeatedly recognized the ability of parties to create a license, which is not a grant of property or possessory rights. Licenses are distinguished from leases in that they are not a grant but merely temporary permission for a specified purpose. One writer has gone so far as to suggest that the use of the license form replace property leasing entirely. (Bailey and Desiderio, “Commercial Property: Landlords May Entirely Eliminate Leasing,” New York Law Journal, April 13, 2005.)

There are, however, risks in the use of the language and form of licenses for owners that should be considered before an effort is made to place items under the license label or format. In the first place, licenses are not automatically subject to the Statute of Frauds and, thus, arguably might be created without the formality of a written statement. The protections afforded by the writing requirement are thereby lost to property owners; even a casual conversation or perhaps an exchange of e-mail messages might give rise to property use rights as a licensee.

In addition, even though RPAPL '713(7) specifically contemplates the possibility of a resort to summary proceedings to remove an offending licensee, the imposition of various procedural requirements might complicate the matter for the owner. In a rent-stabilization context, see, e.g., ATM One LLV v. Landaverde , 2 N.Y.3d 472, 779 N.Y.S.2d 808 (2004). Faced with such complications, landlord/owners might not be willing to avail themselves of the right to self-help even though it is protected in such circumstances and proceedings are not actually necessary. P. & A. Bros. v. City , 184 A.D.2d 267, 585 N.Y.S.2d 335 (1st Dept 1992).

Further Difficulties

Other complications for both owners and occupants may result from attempted use of the license construct. On the one hand, the usual restrictions against exoneration for negligence contained in General Obligations Law ' 5-321 are not applicable to licenses as they are to leases. Karp v. Federated Dept Stores Inc. , 301 A.D.2d 574, 754 N.Y.S.2d 27 (2d Dept 2003); Brown v. Town of Clarence , 181 A.D.2d 1055, 582 N.Y.S.2d 315 (4th Dept. 1992). Real estate management has traditionally managed to avoid the unintended results of that preclusion in leasing arrangements by resort to indemnification and reimbursement provisions. Property insurance is written in contemplation of such contractual provisions. Would efforts to characterize occupancy arrangements as licenses rather than leases disturb those arrangements and the protective insurance?

One recent lower court case suggests another possible difficulty related to a statutory provision in the General Obligations Law, '5-903. In Harlen Housing Associates v. Metered Appliances, Inc. , 19 Misc 3d 1101 (Civil NY Co. 2008, Scarpulla, J.), the landlord and a laundry concessionaire disputed whether their 10-year arrangement was a lease or a license. (Curiously, it is in the area of laundry facilities in larger buildings that many similar cases appear to have arisen.) The language of the written document commencing the arrangement appeared unequivocal in creating a lease, renewable for an additional 10-year period. In the course of the protracted litigation, landlord raised the specter of the provisions of New York General Obligations Law '5-903 that require special notice from the “service provider” of any automatic renewal of a contract. The provision is not applicable to leases, however, said the court.

Conclusion

Given all of the resulting uncertainty, including the likelihood that insurance on the building is probably already in place based on the expectation of leased space, owners' expression of the need for simplicity by way of the “license” route should not be the subject of attorney/draftsmen compliance. Better to develop a sufficiently short form of “temporary lease” with enough of the critical provisions or incorporation by reference of relevant statutory provisions.

Lawrence A. Kobrin is senior counsel to Cahill Gordon & Reindel LLP. Aryeh Haselkorn, an associate, and Aryeh Pomerantz, a summer associate, assisted in the writing of this article.