Lease vs License Agreement

Photo by: Alex Wong

Photo by: Alex Wong

If you are opening a brick and mortar store and are about to sign your first lease on a space or if you are moving to a new space, congratulations! Committing to a location for your business for a number of years is a big commitment. Before you put your signature on that document, let’s clarify whether you are holding a lease or a license agreement and what that means.

A lease gives exclusive possession in the premises.

Regardless of whether the agreement is labeled a “lease” or “license agreement” the test of whether the law considers an agreement to use real estate is a license or a lease is whether the contract gives you exclusive possession of the premises “against all the world, including the owner.” If it does, then you have a lease. If the agreement only gives you the privilege to occupy the premises under the owner, in which case it is a license. An example of this would be, someone who rents a home for a 1 year term, who has the homeowner’s agreement that the homeowner doesn’t have the right to enter the premises unless s/he gives notice, has a lease. If that renter turns around and puts a room up on Airbnb for someone to stay a few nights, the renter is giving the Airbnb guest a license to use the room. (We’re going to ignore whether doing so is a violation of the lease or local ordinances.)

A license is generally revocable at any time.

Legally, a lease gives you, the lessee, an interest in the real estate. A license however, only gives you permission to use the real estate but no interest in it. Since a licensee has no interest in the real estate, the licensor may generally revoke the license at any time. Leases, however, give the lessee the right to certain notices before the lessee’s right in the real estate could be terminated.

Effective negotiation is key.

The parties may contract around the revocability and notice issues, which makes the effective crafting and negotiation of license agreements extremely important. Remember that s/he who drafts the contract holds the power and if you are signing a contract that someone else prepared, careful review and negotiation of the terms is an essential investment in the success of your business.

Learn more about breach of contract in California.

Schedule a call if you have questions about your lease or license agreement.

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In: Contracts, Starting a Business

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