Court of Appeals Redefines what Constitutes a License – Potential Benefits for Owners of Commercial Property

Land Use

For at least 150 years, New York law has defined a license as “the authority to enter on the land of another, and do a particular act or series of acts, without possessing any interest in the land.” See Dolittle v. Eddy, 7 Barb. 74 (Supreme Court, New York County, 1849). That all changed when earlier this year, in Union Square Park Community Coalition v. New York City Department of Parks and Recreation, the Court of Appeals expanded what constitutes a license agreement.

Unlike a tenant, who obtains the exclusive right to use and occupy the leased premises in exchange for the payment of rent, a licensee obtains no interest in the land, only a revocable privilege to use another’s land temporarily for a specified fee. In Union Square, the court approved an agreement between the City Parks Department (the “Department) and a private corporation permitting the corporation to operate a seasonal restaurant in the Union Square Park pavilion. The agreement was for a 15 year term with an annual “license fee” of $300,000.00 in the first year, increasing to about $450,000.00 in the final year, or 10% of the annual gross receipts, whichever amount was greater. The agreement also obligated the corporation to make capital improvements totaling $700,000.00.

In holding that the agreement constituted a license, and not a lease, the court relied upon the following factors: (1) the Department retained significant control over the daily operations of the restaurant including the months and hours of operation, staffing plan, work schedules and menu prices, (2) use of the premises would only be seasonal and not exclusive as the restaurant was required to make outdoor seating available to the public during the summer months, and most importantly, (3) the agreement broadly allowed the Department to terminate the license at will, as long as the termination was not arbitrary and capricious.

The court’s ruling in Union Square conflicts with its earlier precedent in Miller v. City of New York, a case with facts very similar to Union Square.  In Miller, the court held that a purported license agreement between the City of New York and a private corporation, allowing the corporation to construct a golf-driving range with accessory shops and a parking lot on public park land was, in fact, a lease. The agreement required the company to pay a license fee to the city based on a percentage of gross receipts for a 20 year term and the Parks Commissioner held certain “revocable” termination rights. Based on these facts, the Miller court held that the purported license agreement was “as a matter of law and on its face…a lease and not a mere revocable license.”

Contrary to the holding in Union Square, the Miller court held that controls such as “price, hours of operation and choice of employees, etc… are no more than what would be reasonably demanded by a careful owner against a lessee for such a business and for so long a term.” The Miller court also held that a termination clause which is not revocable at the licensors pleasure is not truly exercisable “at will.”

In Union Square, the restaurant’s occupancy is exclusive with respect to the kitchen and bar facilities (the only exception to exclusivity being certain outdoor seating in the summertime), and, as noted in Miller, controls over the restaurants hours of operation, prices and staffing do not necessarily turn a lease into a license. Finally, as in Miller, the agreement with the restaurant in Union Square is not truly terminable “at will,” as the agreement forbids any termination by the City of New York that is “arbitrary and capricious.” Thus, any decision by the city to revoke the restaurant’s license would be subject to judicial review and possibly require the city to pay damages if such revocation is found to be arbitrary or capricious.

Commercial property owners may stand to benefit immensely from the court’s ruling in Union Square as it provides the authority to grant licensees (a) more exclusive use and possession of the licensed premises without granting licensees an interest in the property, (b) lengthier terms than typically granted to licensees before Union Square, and (c) charge license fees that more closely resemble rental payments in a lease agreement. Another potential benefit to property owners is that license agreements give owners the right to remove undesirable licensees without resort to the lengthy, costly, and often frustrating litigation required to evict a tenant in a typical landlord/tenant dispute.

Unless the Union Square decision is limited to its particular facts, the Court of Appeals may have inadvertently changed the landscape in which real estate attorneys draft and negotiate licenses for the use of commercial property.

To read the decision in its entirety click here.

 

Posted by Nick Cappadora