Thinking Outside of the Big-Box: Understanding License Agreements

Most significantly, a typical license may be revoked or terminated by the shopping center, at will, and without cause. A termination clause allowing the licensor to cancel, revoke, or terminate the agreement, without cause, is strongly indicative that the agreement is a license, whereas a lease is typically terminable only upon some specific events.

Because a license allows a shopping center to retain possession and control and terminate the agreement at any time, license agreements are a helpful tool when a shopping center owner wishes to have more flexibility. As shopping centers evolve, they are connecting to their communities in new and dynamic ways, by showcasing attractions, hosting events, and partnering with community organizations more than ever before. License agreements provide a tool to manage these temporary and episodic relationships.

License or Lease?

Many shopping centers owners routinely use license agreements to memorialize any short-term occupancy of space, but they should be cautious to understand the true nature of the arrangement based on the underlying rights granted. Just because an agreement is titled a “lease” or a “license agreement” does not necessarily make it so. Likewise, the characterization of the parties as landlord and tenant or licensor and licensee, or other technical language in the agreement, may not be dispositive. Courts across the country typically look beyond the naming of the document and how the parties' roles are referred to, and more closely examine the rights and obligations of the parties to determine whether the agreement is a license or a lease.

The distinction is an important one. The determination of whether an agreement is, in fact, a lease or a license can have significantly different legal consequences. Because a lease is a conveyance of a property right, while a license does not convey any real property interest, there are different legal rights attached to each one. For instance, a leasehold interest may be subject to taxation, while a license might not be. A lease may be assumed or rejected in bankruptcy, while a license may not be. A lease may be subject to state landlord-tenant laws that may not apply to licenses. Moreover, where an occupant purports to assign, sublease, or otherwise transfer its interest to another, the validity of such transfer may be enforceable so long as the terms of a lease permit it, but is not enforceable if the agreement is only a license.

To determine the intent of the parties, the courts consider various factors, including, among other things, whether the possession granted was exclusive, the degree of control retained or exercised by the shopping center owner, and whether the agreement was terminable at will. Several cases offer some guidance.

In In re Hyman Companies, Inc., 440 B.R. 390 (E.D. Penn. 2010), the tenant, a Chapter 11 bankruptcy debtor, sought to assume a “concession agreement” providing for the location of its retail sales kiosk in a hotel lobby. Applying Massachusetts law, the court held that the concession agreement was a lease because it included terms and limitations that were typical of leases for retail stores. The concession agreement provided that space was being leased, used the words “rent” or “rental” repeatedly, and referred to the premises being “reletted” and to one party as “tenant.” The court further noted that the hotel operator did not refer to the concession agreement as a license until after litigation concerning the validity of the purported termination had already commenced, but instead referred to it as a lease.

In Stevens v. Rosewell, 523 N.E.2d 1098 (Ill. App. 1988), the owner and operator of a McDonald's restaurant located on a community college campus brought a declaratory judgment action against county officials seeking to enjoin the collection of back real estate taxes. Although the agreement itself stated that it was a license and not a lease, the appellate court found that it was a lease because the agreement was for a fixed term, at a fixed rent, there was a fixed location, and McDonald's had exclusive control of the kitchen facilities.

The case of Z. Justin Management Co., Inc. v. Metro Outdoor, LLC, 137 A.D.3d 577 (2016), involved a purported wrongful assignment of an outdoor advertising agreement between the plaintiff and advertiser. The plaintiff asserted that despite the title of the agreement as a “Sublease,” it was actually a license agreement, which is not assignable as a matter of law. The Supreme Court of New York held that the advertising agreement was a lease, based upon language in the agreement that the property was granted exclusively to the advertiser and the agreement was not revocable at will. Likewise, in Soltesz v. Rushmore Plaza Civic Center, 863 F. Supp. 2d 861 (W.D. S.D. 2012), a District Court in Wisconsin held that a business owner's contract with a city to operate a pizza concession at the civic center was not a license, but was a lease, and therefore was subject to statutory eviction procedures. The court based its determination on language in the agreement that granted the property to the pizza concessionaire for its use for a five-year term and required that the concessionaire surrender the property back to the city in the same condition in which it was received.

In contrast, the Illinois Supreme court in Millennium Park Joint Venture, LLC v. Houlihan, 241 Ill.2d 281 (Ill. 2010), considered whether a taxpayer's concession permit with the city park district that allowed the taxpayer to use certain portions of the city park to operate a food concession service was a lease or license, as the applicable tax code authorized a tax assessment on a leasehold interest in tax-exempt property, but not licensed property. The Supreme Court of Illinois held that the taxpayer's agreement with the city to use the park was a license, not a lease, and that the interest was therefore not taxable. The agreement did not permit the exclusive use of any portion of the city park, and it gave the park district extensive control over all aspects of the taxpayer's business, including its days and hours of operation, its products, suppliers, employee uniforms, signs and tips. Employee conduct was controlled by the park district, as was trash placement and pickup; use, content and location of product price boards; and repair and maintenance activities.

In Kmart Corp. v. Footstar, Inc., No. 09 C 3607, 2009 WL 4544700 (N.D. Ill. Dec. 1, 2009), the court considered the enforceability of an indemnity provision of a master agreement between Kmart and an operator of the footwear department in Kmart stores. As an affirmative defense to Kmart's claim for indemnity, the operator asserted that the agreement was a lease, to which the

Landlord and Tenant Act would apply to make the indemnity provision unenforceable. The court concluded that the master agreement was a license because it did not specify the extent and bounds of any particular premises but instead left that decision to the discretion of Kmart's planning department. The master agreement also stated that the operator of the footwear department was an independent contractor, and that the location and size of the department could change at any time. Further, the master agreement was not assignable or transferable, and the fees due to Kmart were calculated based upon gross sales. Kmart also retained extensive control over the premises and the operator's business.

Conclusion

As the cases discussed indicate, whether a relationship is a lease or license is not always a simple determination. In order for shopping centers to ensure that their so-named license agreements will be recognized as such, and not treated as leases, it is important to comprehend the unique characteristics of each. By understanding the distinctions, a shopping center can carefully draft license agreements that contain terms giving each party the rights and obligations consistent with the legal relationship they desire.

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Kelly Stohs is a business litigator at Polsinelli who has focused the last decade of her practice on real estate litigation, represents shopping centers, national property management firms, property owners and investors, and high-volume residential investors. David Vallas is also an attorney at Polsinelli who handles complex commercial foreclosure cases, commercial lease disputes and other matters for business entities of many kinds. Both authors are members of the Editorial Board of Commercial Leasing Law & Strategy.