Blog Ohio Real Estate Law / 08.01.2016

Is it a Lease or a License?

By Stephen D. Richman

license or a lease

It’s a license, it’s a lease, it’s a license and a lease. Actually, while Faye Dunaway’s character in the movie Chinatown could be both mother and sister to “Katherine”, a transferred right regarding real estate cannot be both a license and a lease.

So, is a kiosk at a shopping mall, for example, a license, or a lease? How about the use of a building roof for a billboard; license or lease? Does it really matter what you call it? Is this the case of a distinction without a difference?

Although the terms are often used interchangeably, in Ohio (and most other jurisdictions) there is a distinct difference. As aptly summarized by the Eighth District of Ohio Court of Appeals in Bewigged By Suzzi, Inc., Appellant, v. Atlantic Dept. Stores, Inc., et al., Appellees, 1976 Ohio App. LEXIS 5803,The major difference between a license and a lease is a license to do an act upon land involves exclusive occupation of the land by the licensee [only] so far as is necessary to do the act and no further, whereas a lease gives the right of possession of the land and the exclusive occupation of it for all [emphasis provided] purposes not prohibited by its terms. A further distinguishing feature is the difference in the expected duration of a tenancy as opposed to a license. In dealing with a leasehold estate, the estate will be initially terminable only upon the expiration of a specific period of time, unless the parties specifically make an agreement to the contrary. The rule is exactly the opposite in licenses. A license is terminable at will unless the parties specifically provide to the contrary and the licensee holds a license coupled with an interest.”

The difference between license and lease definitely mattered to Tower Place Mall and its property manager in Schloss v. Sachs, 63 Ohio Misc. LEXIS 76 (Ohio Muni. Court, 1993).

In this case, Suzanne Schloss sued the mall’s managing agent (Mr. Sachs) claiming breach of an oral license agreement whereby Sachs allegedly promised to pay one-half of the construction costs of a kiosk that Schloss would build and operate for six months at the mall. Mr. Sachs filed a motion to dismiss, claiming that if there was a verbal agreement, it was a verbal lease, not a license, and since leases of commercial real estate must be in writing to be enforceable, the plaintiff was entitled to no relief whatsoever.

Applying case law and the facts, the court in Schloss basically reasoned that the kiosk use would constitute exclusive use of a small, but distinct part of the mall, and therefore, the use would be characterized as a lease vs a license. The court contrasted these facts with those of a coffee truck vendor who has a license to sell its coffee/food at various places within a property but not, at a specific, exclusive spot for a definite term. Once the court in Schloss established that a lease was created, the plaintiff’s action was summarily dismissed because pursuant to Ohio law (and most other jurisdictions via the “Statute of Frauds”), leases of commercial real estate must be in writing to be enforceable.

The difference between license and lease also mattered to Atlantic Department Stores; the defendant-appellee in the Bewigged By Suzzi case cited above. In this case, the agreement in question gave the appellee-plaintiff the right to establish a wig department in various stores owned by Atlantic. For a couple of years after the stated expiration of the agreement, the wig departments remained and the wig company paid Atlantic based on previous amounts due. In November of 1973, Atlantic seized the wig company’s inventory and removed same from its stores. While the court of appeals in Bewigged reversed the trial court decision and held that the seizure of the goods was wrongful, the wig company wanted the court to apply landlord-tenant “holdover case law” to its case, in effect holding the agreement to be a lease vs a license.

Ohio “holdover law” provides (unless lease language specifically states otherwise) that a tenant holding over past its lease expiration, and paying rent as and when previously paid is deemed to have entered into a new, periodic tenancy based upon how frequently its rent is paid. So, for example, if a tenant paying rent annually, holds over its one year lease, and makes a new annual payment at the beginning of year two, (and same is accepted by the landlord), the lease would be deemed extended for one year. If a tenant holds over after such one year lease, and rent is paid monthly, the tenant’s subsequent payment of monthly rent would establish a new, month to month periodic lease.

The court of appeals in Bewigged easily came to the conclusion that a holdover situation was not in effect because the agreement in question was not a lease, but a license. The court reasoned that while the agreement provided certain square footage requirements for the wig departments, it did not specify specific, exclusive areas of the stores to be used for the sale of wigs. Also, the wig company had other rights with respect to the space, other than to sell wigs. The court also found it easy to refuse to create a “holdover license” rule. The court explained that the very nature of a license is such that it is opposite to that of a lease with regard to term. A license is terminable at will unless the parties specifically provide to the contrary. Leases, on the other hand are typically for fixed terms.

As the aforesaid cases demonstrate, it matters greatly, whether or not a right with regard to property is designated a license or a lease. As Ms. Schloss unfortunately discovered, an aggrieved party will not be able to enforce, in a court of law, an unwritten commercial lease. Verbal licenses, on the other hand are enforceable. As the owner of the wig company in “Bewigged” learned (the hard way), there is no “holdover license law”. Only a lease holdover can result in a new, periodic tenancy.

So what is the moral of this story? Just say “license” when you want a license” and say “lease” when you want a lease? If only it were that easy. As the United States District Court for the Eastern District of California aptly explained in United States of America v. Southern California Edison Company, 2004 U.S. Dist. LEXIS 4545, “Even where a writing exists which categorizes the agreement concerning the property as either a lease, easement or license, that categorization will not control the determination, although the courts will consider the title and language of the document used in deciding the nature of the interest at stake. Generally, courts look to the intent of the parties concerning the property to determine whether the agreement should be interpreted to create a lease, easement or license.”

In synthesizing Ohio cases, the “the key fact in determining whether an agreement constitutes a license or a lease is whether the lessee/licensee has exclusive possession and the power to exclude  the lessor/licensor from a specific area.” (Schloss, HN4). This rule seems to have been correctly applied in the above-mentioned cases. The owner of the wig company in Bewigged had a license because she only had the right to a wig department at several stores, not the wig department at specific locations within such stores. The right to use the kiosk in Schloss was held to be a lease because the kiosk was assigned a specific space, and the landlord could not do anything else with that space. Of course, a kiosk on a different set of facts might be held to be a license vs. a lease. Such was the case with a recent decision in Connecticut.

 

If the above sounds convoluted, without a “bright line test” to work in all situations, it is. Even the United States District Court in the Southern California Edison Company case admitted that “Distinguishing between a lease, an easement and a license concerning the use of real property can be complicated.” At least we know that a property right can’t be a license and a lease…at least until a judge holds that a “leasance” was created on the facts of a particular case in the future.