Leases and Licenses Grow Increasingly Indistinguishable

Lease or License?

Intention of the Parties

Frequently, courts have held that the proper characterization of an occupancy agreement depends on the intention of the parties. See, e.g., Unique Laundry Corp. v. Hudson Park NY LLC, 865 N.Y.S.2d 203, 205 (1st Dept. 2008); Nextel of New York Inc. v. Time Mgmt. Corp., 746 N.Y.S.2d 169, 170 (2d Dept. 2002). However, such intention must be manifested in the specifics of the transaction. Merely adding a conclusory provision or two, folding in some window dressing and labeling the document a license will not suffice. As written by the Appellate Division in Federation of Organizations Inc. v. Bauer, 788 N.Y.S.2d 806 (App. Div. 2004), “if the nature of the parties' relationship [satisfies] the requirements for the existence of a landlord-tenant relationship, [the] court is not obligated to accept the parties' characterization that [the occupant] was a licensee rather than a tenant.” Thus, a court's analysis likely will focus on the substance of the agreement in determining whether the parties intended to create a lease or a license.

Transaction Structure

Under the case law, the primary distinction between a lease and a license is that leases grant exclusive use of specific premises. For example, in Nextel of New York Inc. v. Time Management Corp., 746 N.Y.S.2d 169 (2d Dept. 2002), the court concluded that “[t]he central distinguishing characteristic of a lease is the surrender of absolute possession and control of property to another party for an agreed-upon rental ' A license ' confers only the nonexclusive, revocable right to enter the land of the licensor to perform an act.”

In Nextel, a cell phone service provider arranged to install its antennae and equipment on 200 square feet of a roof. An attachment to the agreement specifically identified the space to be used. Nextel was required to create its own exclusive area by erecting partitions and a door, and was also required to install a new air-conditioning system. Finally, the agreement gave Nextel's employees exclusive and unlimited access to the premises, and expressly granted Nextel the right to quiet enjoyment. Based on all of these factors, the court concluded that the parties intended to create a lease.

Likewise, in Tsabbar v. Auld, 714 N.Y.S.2d 489 (1st Dept. 2000), a grant of exclusive use of a specific premises, and nothing more, was sufficient to characterize an occupancy agreement as a lease, rather than a license. In Tsabbar, the lessee of a professional cooperative apartment ostensibly licensed portions of his premises to other healthcare professionals in an attempt to circumvent a prohibition against subletting without the cooperative corporation's consent. The court held that, due to the express grant of exclusive use and occupation, the agreements with the health care professionals “were not mere licenses, but subleases.” Other than the exclusive use provision, the court did not consider any other terms of the agreements in coming to its conclusion.

Other Possible Factors

Although the presence or absence of a grant of exclusive use of a specific premises is the primary factor in determining whether a document is a lease or a license, the case law suggests that other factors also might be examined.

Thus, in Coinmach Corp. v. Harton Associates, 758 N.Y.S.2d 388 (2d Dept. 2003), the Appellate Division, holding an agreement to be a lease rather than a license, stated that “[i]t contained a description of the specific premises to be occupied by plaintiff, specified the amount of rent to be paid, and provided for the plaintiff's exclusive use and occupancy for a fixed period of time.” Query whether the same result would have obtained had the agreement not required the payment of rent, or was for an indeterminate period of time.

Appurtenances

Aside from the lease or license designation, an interest in real property may be found to be an “appurtenance,” which has been defined as “a right and privilege which is essential or reasonably necessary to the full beneficial use and enjoyment of leased premises.” Blenheim LLC v. Il Posto LLC, 827 N.Y.S.2d 620 (NYC Civ. Ct. 2006). The topic of appurtenances is beyond the scope of this article.

Does It Really Matter?

Termination and Eviction

Generally speaking, a license is revocable at will by the licensor, which is decidedly an advantage to a property owner when compared to the procedures that must be followed to terminate a lease and evict a tenant. However, the property owner still must follow the requirements of the New York Real Property Actions and Proceedings Law (RPAPL) in order to implement a revocation and end the licensed use of the premises. In this regard, RPAPL ' 713 states that “[a] special proceeding may be maintained ' after a 10 day notice to quit has been served upon the respondent ' [if] (a) his license has expired, or (b) his license has been revoked by the licensor, or (c) the licensor is no longer entitled to possession of the property ' “

In By the Stem, LLC v. Optimum Properties Inc.,862 N.Y.S.2d 756 (App. Div. 2008), the court found that a property owner “had the right to terminate the petitioner's license at will, [but] did not provide notice and, therefore, failed to properly effectuate a revocation of [the] license.”

The court further observed that “telephone calls with the intent to harass and intimidate, the padlocking of the basement entry door, and the shutting off of the utility services, amounted to nothing more than self-help and constituted an unlawful eviction.” In response to the conduct of the property owner, the court even contemplated awarding the licensee treble damages.

As shown by the provision of the RPAPL quoted above, as well as in the case law concerning evictions of licensees, a licensee has some procedural protections against overreaching by a property owner bent on eviction, even though it must be conceded that a license generally is not as protective of the occupant as would be a lease.

Creation of Tenancy at Will

In extreme cases, a property owner might run the risk that conduct and circumstance will be held to render a license irrevocable as a tenancy at will. For example, in Faith United Christian Church Inc. v. United Christian Church, 698 N.Y.S.2d 874 (App. Div. 1999), the court found that “a license may become irrevocable where the licensee has altered its position in reliance upon the license.” Although the court found that the facts in Faith United did not justify such a holding, it stated that, where a party spends money in reliance on the license agreement, the agreement may become irrevocable.

Thus, in UHAB HDFC v. Diaz, 809 N.Y.S.2d 484 (N.Y. App. Term 2005), a licensee had occupied an apartment for approximately 20 years, and made improvements to the apartment. The licensee also paid dues to the building's “homestead association,” spent approximately $20,000 and expended considerable time and effort in repairing the apartment and the building's common areas under a “sweat equity” arrangement. The court held that “[o]n these facts, the record compels the conclusion that the City, as predecessor owner, acquiesced in [the licensee's] long-term occupancy, and supports the inference ' that a tenancy at will was created.” Accordingly, the court found that the 10-day notice to quit under RPAPL ' 713 was inapplicable, and the process for terminating a lease and evicting a tenant was mandated.

Exculpation from Negligence

New York General Obligations Law ' 5-321 provides that:

[e]very covenant [in a] lease of real property exempting the lessor from liability for damages for injuries to person or property caused by or resulting from the negligence of the lessor, his agents, servants or employees, in the operation or maintenance of the demised premises or the real property containing the demised premises shall be deemed to be void as against public policy and wholly unenforceable.

This provision is inapplicable to a license, and there is no analogous provision forbidding the exculpation of licensors. Brown v. Town of Clarence, 582 N.Y.S.2d 315 (4th Dept. 1992).

In Balyszak v. Siena College, 882 N.Y.S.2d 335, 336 (3d Dept. 2009), a college entered into a “Facility Rental Agreement” with a volleyball league for the use of a field house on the college's campus for a volleyball tournament. According to the agreement, the league was to indemnify the college for all injury claims that arose as a result of the league's use of the premises. During the tournament, a referee employed by the league was injured on the campus. The court found that “the use of the field house authorized by the agreement constituted a license and, thus, General Obligations Law ' 5-321 is not implicated.”

'Yellowstone' Injunctive Relief

In New York, one of the most significant tools available to a tenant's attorney is the Yellowstone injunction. If the injunction is granted, the landlord's attempt to evict the tenant is placed on hold while the parties litigate whether or not the landlord in fact has legitimate grounds for eviction. If the court ultimately finds that the tenant was indeed in default under the lease, the tenant is given the remainder of the lease's cure period to cure the default before the landlord may once again pursue an eviction.

As a general rule, a court will not grant a Yellowstone injunction to a licensee. In CC Vending Inc. v. Berkley Educ. Servs. of New York Inc., 903 N.Y.S.2d 37 (1st Dept. 2010), for example, the court held that a vending machine company had “no control over defendant's premises where the vending machines are located, it [had] no tangible interest in the property, and thus [had] no right to a Yellowstone injunction.” Clearly, the opportunity to deprive an occupant of rights under the Yellowstone line of cases should be a consideration for both parties in determining whether to create a lease or a license.

Other Injunctive Relief

While licensees generally are not entitled to the protection of a Yellowstone injunction, they are entitled to injunctive relief in other circumstances, where the licensee makes a sufficient showing of irreparable harm in the absence of the requested relief, a likelihood of success on the merits and a balance of the equities that favors the licensee.

In Sirius Satellite Radio Inc. v. Chinatown Apartments Inc., 756 N.Y.S.2d 557 (1st Dept. 2003), a satellite radio provider entered into a license agreement to use the defendant's roof. Some time thereafter, the defendant removed Sirius's equipment and interfered with its employees' ability to access the roof. The court concluded that injunctive relief was appropriate because of the “far-reaching adverse network-wide consequences of defendant-appellant's refusal to permit the installation and operation of plaintiff's equipment on its uniquely situated roof.”

Bankruptcy

As a general rule, a bankruptcy trustee may “subject to the court's approval ' assume or reject any executory contract or unexpired lease of the debtor.” Where the debtor is a landlord, however, its lease is a mixed obligation. It is executory with regard to those “contractual” obligations that are performable in the future, such as the covenant to provide heat. It is not executory with regard to the grant of a real property interest to the tenant ' the leasehold estate. Consequently, under ' 365(h) of the Bankruptcy Code, if a landlord's bankruptcy trustee rejects an unexpired lease, the lessee may either treat the lease as terminated or keep its real property interest ' and possession of its premises ' while forgoing the landlord's covenants in the lease. 11 U.S.C. ' 356(a) (2011).

No definitive case law on the question of licensees' rights in bankruptcies of their licensors could be located. However, the treatises indicate that, with no real estate interest implicated, licensees have no rights under, or analogous to, ' 365(h). As a result, if a licensor becomes a debtor and rejects the license, its licensee would have no further rights at all under the license and could be compelled to end its use of the premises.

Conclusion

The case law indicates that courts will look past labels and window-dressing, and analyze the structure of the relationship established in a document purporting to be a license. If the document gives the space user the exclusive right to occupy specific space, the arrangement is likely to be found to be a lease. If not, the arrangement is likely to be found to be a license.

Whether a property owner is better served being a landlord or a licensor is less clear. Various important rights of a tenant would not be available to a licensee. However, licensees are not without procedural protections. Also, while litigators are well versed in representing landlords and tenants in eviction proceedings, where rules and customs are long settled and familiar, evicting a licensee might not fit any mold. If the case goes poorly, the property owner might well wish that the relationship had been defined clearly as that of landlord and tenant from the outset.

Marc S. Intriligator is a member, and Joel Harrison is an associate, of Cozen O'Connor in New York. This article also appeared in the New York Law Journal, an ALM sister publication of this newsletter.

Lately, it has become fashionable for some property owners to call their standard occupancy agreements licenses rather than leases. Perhaps the document will also contain a recital, buried among the assorted “boiler plate” provisions, that the parties intend to create a license rather than a lease. And the parties are called “Licensor” and “Licensee,” rather than “Landlord” and “Tenant.” Otherwise, except perhaps for some carefully selected deletions, the document virtually is indistinguishable from a typical lease.

In theory, a lease both grants a real property interest in the occupied premises and contains contractual terms between the landlord and tenant. A license similarly contains contractual terms upon which the licensor is allowed to use space, but without granting a real property interest to the licensee. Consequently, a license is thought to be less protective of the space user's interests, and thus more desirable to the property owner, than a lease.

The trend favoring licenses over leases raises two basic questions. First, will courts likely honor what essentially is a label given by the parties to their legal relationship, or will they instead examine the substance of the transaction in order to classify the arrangement? Second, what are some of the advantages and disadvantages of being a licensor rather than a landlord?

Lease or License?

Intention of the Parties

Frequently, courts have held that the proper characterization of an occupancy agreement depends on the intention of the parties. See, e.g., Unique Laundry Corp. v. Hudson Park NY LLC , 865 N.Y.S.2d 203, 205 (1st Dept. 2008); Nextel of New York Inc. v. Time Mgmt. Corp. , 746 N.Y.S.2d 169, 170 (2d Dept. 2002). However, such intention must be manifested in the specifics of the transaction. Merely adding a conclusory provision or two, folding in some window dressing and labeling the document a license will not suffice. As written by the Appellate Division in Federation of Organizations Inc. v. Bauer , 788 N.Y.S.2d 806 (App. Div. 2004), “if the nature of the parties' relationship [satisfies] the requirements for the existence of a landlord-tenant relationship, [the] court is not obligated to accept the parties' characterization that [the occupant] was a licensee rather than a tenant.” Thus, a court's analysis likely will focus on the substance of the agreement in determining whether the parties intended to create a lease or a license.

Transaction Structure

Under the case law, the primary distinction between a lease and a license is that leases grant exclusive use of specific premises. For example, in Nextel of New York Inc. v. Time Management Corp. , 746 N.Y.S.2d 169 (2d Dept. 2002), the court concluded that “[t]he central distinguishing characteristic of a lease is the surrender of absolute possession and control of property to another party for an agreed-upon rental ' A license ' confers only the nonexclusive, revocable right to enter the land of the licensor to perform an act.”

In Nextel, a cell phone service provider arranged to install its antennae and equipment on 200 square feet of a roof. An attachment to the agreement specifically identified the space to be used. Nextel was required to create its own exclusive area by erecting partitions and a door, and was also required to install a new air-conditioning system. Finally, the agreement gave Nextel's employees exclusive and unlimited access to the premises, and expressly granted Nextel the right to quiet enjoyment. Based on all of these factors, the court concluded that the parties intended to create a lease.

Likewise, in Tsabbar v. Auld , 714 N.Y.S.2d 489 (1st Dept. 2000), a grant of exclusive use of a specific premises, and nothing more, was sufficient to characterize an occupancy agreement as a lease, rather than a license. In Tsabbar, the lessee of a professional cooperative apartment ostensibly licensed portions of his premises to other healthcare professionals in an attempt to circumvent a prohibition against subletting without the cooperative corporation's consent. The court held that, due to the express grant of exclusive use and occupation, the agreements with the health care professionals “were not mere licenses, but subleases.” Other than the exclusive use provision, the court did not consider any other terms of the agreements in coming to its conclusion.

Other Possible Factors

Although the presence or absence of a grant of exclusive use of a specific premises is the primary factor in determining whether a document is a lease or a license, the case law suggests that other factors also might be examined.

Thus, in Coinmach Corp. v. Harton Associates , 758 N.Y.S.2d 388 (2d Dept. 2003), the Appellate Division, holding an agreement to be a lease rather than a license, stated that “[i]t contained a description of the specific premises to be occupied by plaintiff, specified the amount of rent to be paid, and provided for the plaintiff's exclusive use and occupancy for a fixed period of time.” Query whether the same result would have obtained had the agreement not required the payment of rent, or was for an indeterminate period of time.

Appurtenances

Aside from the lease or license designation, an interest in real property may be found to be an “appurtenance,” which has been defined as “a right and privilege which is essential or reasonably necessary to the full beneficial use and enjoyment of leased premises.” Blenheim LLC v. Il Posto LLC , 827 N.Y.S.2d 620 (NYC Civ. Ct. 2006). The topic of appurtenances is beyond the scope of this article.

Does It Really Matter?

Termination and Eviction

Generally speaking, a license is revocable at will by the licensor, which is decidedly an advantage to a property owner when compared to the procedures that must be followed to terminate a lease and evict a tenant. However, the property owner still must follow the requirements of the New York Real Property Actions and Proceedings Law (RPAPL) in order to implement a revocation and end the licensed use of the premises. In this regard, RPAPL ' 713 states that “[a] special proceeding may be maintained ' after a 10 day notice to quit has been served upon the respondent ' [if] (a) his license has expired, or (b) his license has been revoked by the licensor, or (c) the licensor is no longer entitled to possession of the property ' “

In By the Stem, LLC v. Optimum Properties Inc.,862 N.Y.S.2d 756 (App. Div. 2008), the court found that a property owner “had the right to terminate the petitioner's license at will, [but] did not provide notice and, therefore, failed to properly effectuate a revocation of [the] license.”

The court further observed that “telephone calls with the intent to harass and intimidate, the padlocking of the basement entry door, and the shutting off of the utility services, amounted to nothing more than self-help and constituted an unlawful eviction.” In response to the conduct of the property owner, the court even contemplated awarding the licensee treble damages.

As shown by the provision of the RPAPL quoted above, as well as in the case law concerning evictions of licensees, a licensee has some procedural protections against overreaching by a property owner bent on eviction, even though it must be conceded that a license generally is not as protective of the occupant as would be a lease.

Creation of Tenancy at Will

In extreme cases, a property owner might run the risk that conduct and circumstance will be held to render a license irrevocable as a tenancy at will. For example, in Faith United Christian Church Inc. v. United Christian Church , 698 N.Y.S.2d 874 (App. Div. 1999), the court found that “a license may become irrevocable where the licensee has altered its position in reliance upon the license.” Although the court found that the facts in Faith United did not justify such a holding, it stated that, where a party spends money in reliance on the license agreement, the agreement may become irrevocable.

Thus, in UHAB HDFC v. Diaz , 809 N.Y.S.2d 484 (N.Y. App. Term 2005), a licensee had occupied an apartment for approximately 20 years, and made improvements to the apartment. The licensee also paid dues to the building's “homestead association,” spent approximately $20,000 and expended considerable time and effort in repairing the apartment and the building's common areas under a “sweat equity” arrangement. The court held that “[o]n these facts, the record compels the conclusion that the City, as predecessor owner, acquiesced in [the licensee's] long-term occupancy, and supports the inference ' that a tenancy at will was created.” Accordingly, the court found that the 10-day notice to quit under RPAPL ' 713 was inapplicable, and the process for terminating a lease and evicting a tenant was mandated.

Exculpation from Negligence

New York General Obligations Law ' 5-321 provides that:

[e]very covenant [in a] lease of real property exempting the lessor from liability for damages for injuries to person or property caused by or resulting from the negligence of the lessor, his agents, servants or employees, in the operation or maintenance of the demised premises or the real property containing the demised premises shall be deemed to be void as against public policy and wholly unenforceable.

This provision is inapplicable to a license, and there is no analogous provision forbidding the exculpation of licensors. Brown v. Town of Clarence , 582 N.Y.S.2d 315 (4th Dept. 1992).

In Balyszak v. Siena College , 882 N.Y.S.2d 335, 336 (3d Dept. 2009), a college entered into a “Facility Rental Agreement” with a volleyball league for the use of a field house on the college's campus for a volleyball tournament. According to the agreement, the league was to indemnify the college for all injury claims that arose as a result of the league's use of the premises. During the tournament, a referee employed by the league was injured on the campus. The court found that “the use of the field house authorized by the agreement constituted a license and, thus, General Obligations Law ' 5-321 is not implicated.”

'Yellowstone' Injunctive Relief

In New York, one of the most significant tools available to a tenant's attorney is the Yellowstone injunction. If the injunction is granted, the landlord's attempt to evict the tenant is placed on hold while the parties litigate whether or not the landlord in fact has legitimate grounds for eviction. If the court ultimately finds that the tenant was indeed in default under the lease, the tenant is given the remainder of the lease's cure period to cure the default before the landlord may once again pursue an eviction.

As a general rule, a court will not grant a Yellowstone injunction to a licensee. In CC Vending Inc. v. Berkley Educ. Servs. of New York Inc. , 903 N.Y.S.2d 37 (1st Dept. 2010), for example, the court held that a vending machine company had “no control over defendant's premises where the vending machines are located, it [had] no tangible interest in the property, and thus [had] no right to a Yellowstone injunction.” Clearly, the opportunity to deprive an occupant of rights under the Yellowstone line of cases should be a consideration for both parties in determining whether to create a lease or a license.

Other Injunctive Relief

While licensees generally are not entitled to the protection of a Yellowstone injunction, they are entitled to injunctive relief in other circumstances, where the licensee makes a sufficient showing of irreparable harm in the absence of the requested relief, a likelihood of success on the merits and a balance of the equities that favors the licensee.

In Sirius Satellite Radio Inc. v. Chinatown Apartments Inc. , 756 N.Y.S.2d 557 (1st Dept. 2003), a satellite radio provider entered into a license agreement to use the defendant's roof. Some time thereafter, the defendant removed Sirius's equipment and interfered with its employees' ability to access the roof. The court concluded that injunctive relief was appropriate because of the “far-reaching adverse network-wide consequences of defendant-appellant's refusal to permit the installation and operation of plaintiff's equipment on its uniquely situated roof.”

Bankruptcy

As a general rule, a bankruptcy trustee may “subject to the court's approval ' assume or reject any executory contract or unexpired lease of the debtor.” Where the debtor is a landlord, however, its lease is a mixed obligation. It is executory with regard to those “contractual” obligations that are performable in the future, such as the covenant to provide heat. It is not executory with regard to the grant of a real property interest to the tenant ' the leasehold estate. Consequently, under ' 365(h) of the Bankruptcy Code, if a landlord's bankruptcy trustee rejects an unexpired lease, the lessee may either treat the lease as terminated or keep its real property interest ' and possession of its premises ' while forgoing the landlord's covenants in the lease. 11 U.S.C. ' 356(a) (2011).

No definitive case law on the question of licensees' rights in bankruptcies of their licensors could be located. However, the treatises indicate that, with no real estate interest implicated, licensees have no rights under, or analogous to, ' 365(h). As a result, if a licensor becomes a debtor and rejects the license, its licensee would have no further rights at all under the license and could be compelled to end its use of the premises.

Conclusion

The case law indicates that courts will look past labels and window-dressing, and analyze the structure of the relationship established in a document purporting to be a license. If the document gives the space user the exclusive right to occupy specific space, the arrangement is likely to be found to be a lease. If not, the arrangement is likely to be found to be a license.

Whether a property owner is better served being a landlord or a licensor is less clear. Various important rights of a tenant would not be available to a licensee. However, licensees are not without procedural protections. Also, while litigators are well versed in representing landlords and tenants in eviction proceedings, where rules and customs are long settled and familiar, evicting a licensee might not fit any mold. If the case goes poorly, the property owner might well wish that the relationship had been defined clearly as that of landlord and tenant from the outset.

Marc S. Intriligator is a member, and Joel Harrison is an associate, of Cozen O'Connor in New York. This article also appeared in the New York Law Journal, an ALM sister publication of this newsletter.