Temporary Leasing and Temporary Licensing

Not very long ago, the idea of leasing within the common areas of an enclosed regional center or on a short-term basis within any type of retail facility was viewed as more of an intrusion than a sought-after tenancy. Over the past several years, however, income derived from temporary leasing/licensing transactions has proven to be a tremendous financial benefit for landlords. As a result, nearly all major landlords have a division that deals exclusively with temporary leasing/licensing matters. Furthermore, the temporary tenants are no longer comprised solely of “mom and pop,” new “start-up” businesses and similar tenants that could not afford the rents paid by “in-line” tenants, but rather may be composed of national tenants and sophisticated tenants very familiar with the leasing process.

As a result, practices that at one time were common and standard for landlords in conducting these temporary leasing/licensing transactions have now become much more sophisticated negotiations. This article addresses several of the changes that have transpired over the past several years, including the use of a lease as opposed to a license, relocation rights, termination rights and exclusive rights.

Lease Versus License

What's the difference? When entering into a temporary occupancy transaction, often the words “lease” and “license” are used interchangeably, even though they mean vastly different things from a legal perspective. A license, by its definition, is simply a property right (not an interest in real estate), which may be terminable, at will, at any time, by either party. In contrast, a lease grants a party the right to occupy a parcel of real estate for a specific period of time, and grants the tenant an interest in the real estate. Further, the lease is only terminable (absent a provision in the lease granting a termination right) upon the expiration of the term of the lease or an act of default committed by the tenant granting the landlord the right to terminate the lease.

The overwhelming majority of temporary tenancy relationships are documented through a license. As a result, an unsophisticated tenant is really only a “licensee” whose interest may be terminable at the will of the licensor. To combat this situation, many licensees attempt to turn the license into a lease. There are several means used to accomplish this transformation. Sometimes, the licensee will make the license an “irrevocable license” or attempt to express the term as a lease of space, only terminable upon a default or expiration of the license. However it is worded, a licensee should be aware that a court may determine that its license is solely an interest in property (not an interest in real estate) and by its definition terminable at the will of the licensor.

In addition, if the document utilized is a license and not a lease, a licensee should be very careful in expending funds to improve the space in furtherance of the license, since the license may be terminable at the will of the licensor.

In the alternative, licensees are asking for a “termination fee” in the event the licensor elects to exercise its right to terminate the license at any time. By negotiating the provision in this manner, the licensor is able to maintain its right to terminate the license at any time, but the licensee is able to derive a benefit from the revocation of its license, even though it will not be able to prevent the licensor from terminating the license. The termination fee could be comprised of any number of elements, including:

• The unamortized cost of leasehold improvements installed by the licensee;
• Profits that could have otherwise been derived by the licensee in subsequent years if the license was not terminated; and
• Costs of relocating or closing the licensee's business.

In any event, the licensor and licensee should reach an agreement as to whether the agreement is terminable at the will of either party and what rights either party will have in the event the agreement is, in fact, terminated.

Relocation

One right that virtually all landlords or licensors want to maintain in their agreement for temporary occupancy tenants (“Temp Tenant”) is the right to relocate the Temp Tenant upon a certain number of days notice. If the Temp Tenant is agreeable that the landlord will have a relocation right in the agreement, there are certain understandings that should be reached regarding the relocation right.

Timing of Relocation

Typically, the Temp Tenant will not want to be relocated during its peak revenue generating months of the year. Further, depending on the seasonality of the Temp Tenant's products, there may be other dates during which the Temp Tenant does not want to be relocated. The landlord and Temp Tenant should reach agreement as to what dates the landlord will not have the right to relocate the Temp Tenant.

Reoccurrence

The parties will need to determine whether the landlord has the right to relocate the Temp Tenant more than one (1) time during the term of the occupancy. A typical license will provide the landlord/licensor the right to relocate the Temp Tenant as often as the landlord/licensor determines. As a result, the parties will need to determine whether the landlord/licensor has an unlimited number of relocation rights, or whether the landlord/licensor will be limited in the number of times it may relocate the Temp Tenant.

Who Performs the Relocation and Who Pays the Costs of Relocation

The agreement should be clear not only as to who is responsible for relocating the Temp Tenant's products, but who is responsible for causing the new space to be in a condition for the Temp Tenant to operate within during the remainder of the term. Often, the agreement will place the responsibility on the Temp Tenant, even though the Temp Tenant had no interest in relocating from its former space. In addition, the parties should determine whether the landlord/licensor will be responsible to reimburse the Temp Tenant for any incidental costs (e.g., new business cards, signage indicating that the Temp Tenant has moved, etc.).

Limitation on the Location of the Replacement Space

Often, the Temp Tenant will want to be able to specify certain areas within the retail facility that it does not want to be located. Any requirements or restrictions that the Temp Tenant wants to have regarding the landlord's/licensor's ability to relocate the Temp Tenant to another location within the retail facility should be established within the agreement between the parties. An easy method for achieving this agreement would be to attach as an exhibit to the agreement a site plan of the retail facility and designate on the site plan certain areas where the Temp Tenant will not agree to be relocated.

Termination Rights

As stated earlier in this article, a license, by definition, is terminable upon notice to the other party. As a result, the parties may want to specify certain restrictions upon the right of one party to terminate the agreement. For instance, a party may not be permitted to terminate the license during a peak time for shopping (e.g., November and December, a back-to-school time, or any time that may be critical to the Temp Tenant, like Mother's Day or Valentine's Day for a jeweler).

In addition, the parties may want to determine whether there will be a “termination fee” or other obligations incurred by the party that is terminating the agreement. As discussed earlier, a termination fee can lessen the impact on the party that is having its rights terminated.

Further, the parties may want to determine if there are a certain number of days' notice for termination of the agreement, in order to provide each party with an ability to transition from the Temp Tenant's tenancy.

Exclusive Protection

Since the goods that the temporary tenants are selling are often highly seasonal and very specific in nature, Temp Tenants often want to create certain exclusive rights that prevent other tenants in the retail facility from selling similar or like goods to those sold by the Temp Tenant. This is especially true in the closed regional mall setting. The idea of a Temp Tenant having any “exclusive” rights was almost unheard of ten (10) years ago, but these Temp Tenants are probably the type of tenant most in need of “exclusive” protection, since their occupancy is by definition temporary and there may not be a great deal of time to establish brand recognition.

At a minimum, Temp Tenants often want to protect a certain area within the retail facility that will not permit the sale of the same or substantially similar goods within that specified area. The parties should be very careful in crafting these exclusive provisions, so that they do not restrict the landlord/licensor from operating the retail facility in the normal course of business, but also protect the core business operations of the Temp Tenant. Further, to the extent that the Temp Tenant is relocated, it should continue to enjoy the same exclusive protection that it enjoyed in its prior location.

Conclusion

By carefully examining the rights and obligations of the parties when entering into a temporary lease/license arrangement, the parties can arrive at a mutually satisfactory agreement that protects the rights and interests of both parties. However, all parties need to realize that the landscape of temporary leasing/licensing has greatly changed over a relatively short period of time.

Glenn A. Browne, a member of this newsletter's Board of Editors, is a shareholder in Braun, Browne & Associates, P.C. which is located in Riverwoods, IL. Mr. Browne's law practice is concentrated in the areas of purchase and sale of real estate, commercial leasing and lease related matters.

Not very long ago, the idea of leasing within the common areas of an enclosed regional center or on a short-term basis within any type of retail facility was viewed as more of an intrusion than a sought-after tenancy. Over the past several years, however, income derived from temporary leasing/licensing transactions has proven to be a tremendous financial benefit for landlords. As a result, nearly all major landlords have a division that deals exclusively with temporary leasing/licensing matters. Furthermore, the temporary tenants are no longer comprised solely of “mom and pop,” new “start-up” businesses and similar tenants that could not afford the rents paid by “in-line” tenants, but rather may be composed of national tenants and sophisticated tenants very familiar with the leasing process.

As a result, practices that at one time were common and standard for landlords in conducting these temporary leasing/licensing transactions have now become much more sophisticated negotiations. This article addresses several of the changes that have transpired over the past several years, including the use of a lease as opposed to a license, relocation rights, termination rights and exclusive rights.

Lease Versus License

What's the difference? When entering into a temporary occupancy transaction, often the words “lease” and “license” are used interchangeably, even though they mean vastly different things from a legal perspective. A license, by its definition, is simply a property right (not an interest in real estate), which may be terminable, at will, at any time, by either party. In contrast, a lease grants a party the right to occupy a parcel of real estate for a specific period of time, and grants the tenant an interest in the real estate. Further, the lease is only terminable (absent a provision in the lease granting a termination right) upon the expiration of the term of the lease or an act of default committed by the tenant granting the landlord the right to terminate the lease.

The overwhelming majority of temporary tenancy relationships are documented through a license. As a result, an unsophisticated tenant is really only a “licensee” whose interest may be terminable at the will of the licensor. To combat this situation, many licensees attempt to turn the license into a lease. There are several means used to accomplish this transformation. Sometimes, the licensee will make the license an “irrevocable license” or attempt to express the term as a lease of space, only terminable upon a default or expiration of the license. However it is worded, a licensee should be aware that a court may determine that its license is solely an interest in property (not an interest in real estate) and by its definition terminable at the will of the licensor.

In addition, if the document utilized is a license and not a lease, a licensee should be very careful in expending funds to improve the space in furtherance of the license, since the license may be terminable at the will of the licensor.

In the alternative, licensees are asking for a “termination fee” in the event the licensor elects to exercise its right to terminate the license at any time. By negotiating the provision in this manner, the licensor is able to maintain its right to terminate the license at any time, but the licensee is able to derive a benefit from the revocation of its license, even though it will not be able to prevent the licensor from terminating the license. The termination fee could be comprised of any number of elements, including:

• The unamortized cost of leasehold improvements installed by the licensee;
• Profits that could have otherwise been derived by the licensee in subsequent years if the license was not terminated; and
• Costs of relocating or closing the licensee's business.

In any event, the licensor and licensee should reach an agreement as to whether the agreement is terminable at the will of either party and what rights either party will have in the event the agreement is, in fact, terminated.

Relocation

One right that virtually all landlords or licensors want to maintain in their agreement for temporary occupancy tenants (“Temp Tenant”) is the right to relocate the Temp Tenant upon a certain number of days notice. If the Temp Tenant is agreeable that the landlord will have a relocation right in the agreement, there are certain understandings that should be reached regarding the relocation right.

Timing of Relocation

Typically, the Temp Tenant will not want to be relocated during its peak revenue generating months of the year. Further, depending on the seasonality of the Temp Tenant's products, there may be other dates during which the Temp Tenant does not want to be relocated. The landlord and Temp Tenant should reach agreement as to what dates the landlord will not have the right to relocate the Temp Tenant.

Reoccurrence

The parties will need to determine whether the landlord has the right to relocate the Temp Tenant more than one (1) time during the term of the occupancy. A typical license will provide the landlord/licensor the right to relocate the Temp Tenant as often as the landlord/licensor determines. As a result, the parties will need to determine whether the landlord/licensor has an unlimited number of relocation rights, or whether the landlord/licensor will be limited in the number of times it may relocate the Temp Tenant.

Who Performs the Relocation and Who Pays the Costs of Relocation

The agreement should be clear not only as to who is responsible for relocating the Temp Tenant's products, but who is responsible for causing the new space to be in a condition for the Temp Tenant to operate within during the remainder of the term. Often, the agreement will place the responsibility on the Temp Tenant, even though the Temp Tenant had no interest in relocating from its former space. In addition, the parties should determine whether the landlord/licensor will be responsible to reimburse the Temp Tenant for any incidental costs (e.g., new business cards, signage indicating that the Temp Tenant has moved, etc.).

Limitation on the Location of the Replacement Space

Often, the Temp Tenant will want to be able to specify certain areas within the retail facility that it does not want to be located. Any requirements or restrictions that the Temp Tenant wants to have regarding the landlord's/licensor's ability to relocate the Temp Tenant to another location within the retail facility should be established within the agreement between the parties. An easy method for achieving this agreement would be to attach as an exhibit to the agreement a site plan of the retail facility and designate on the site plan certain areas where the Temp Tenant will not agree to be relocated.

Termination Rights

As stated earlier in this article, a license, by definition, is terminable upon notice to the other party. As a result, the parties may want to specify certain restrictions upon the right of one party to terminate the agreement. For instance, a party may not be permitted to terminate the license during a peak time for shopping (e.g., November and December, a back-to-school time, or any time that may be critical to the Temp Tenant, like Mother's Day or Valentine's Day for a jeweler).

In addition, the parties may want to determine whether there will be a “termination fee” or other obligations incurred by the party that is terminating the agreement. As discussed earlier, a termination fee can lessen the impact on the party that is having its rights terminated.

Further, the parties may want to determine if there are a certain number of days' notice for termination of the agreement, in order to provide each party with an ability to transition from the Temp Tenant's tenancy.

Exclusive Protection

Since the goods that the temporary tenants are selling are often highly seasonal and very specific in nature, Temp Tenants often want to create certain exclusive rights that prevent other tenants in the retail facility from selling similar or like goods to those sold by the Temp Tenant. This is especially true in the closed regional mall setting. The idea of a Temp Tenant having any “exclusive” rights was almost unheard of ten (10) years ago, but these Temp Tenants are probably the type of tenant most in need of “exclusive” protection, since their occupancy is by definition temporary and there may not be a great deal of time to establish brand recognition.

At a minimum, Temp Tenants often want to protect a certain area within the retail facility that will not permit the sale of the same or substantially similar goods within that specified area. The parties should be very careful in crafting these exclusive provisions, so that they do not restrict the landlord/licensor from operating the retail facility in the normal course of business, but also protect the core business operations of the Temp Tenant. Further, to the extent that the Temp Tenant is relocated, it should continue to enjoy the same exclusive protection that it enjoyed in its prior location.

Conclusion

By carefully examining the rights and obligations of the parties when entering into a temporary lease/license arrangement, the parties can arrive at a mutually satisfactory agreement that protects the rights and interests of both parties. However, all parties need to realize that the landscape of temporary leasing/licensing has greatly changed over a relatively short period of time.

Glenn A. Browne, a member of this newsletter's Board of Editors, is a shareholder in Braun, Browne & Associates, P.C. which is located in Riverwoods, IL. Mr. Browne's law practice is concentrated in the areas of purchase and sale of real estate, commercial leasing and lease related matters.