By Charlie Katz-Leavy, Partner, Verrill Dana, LLP
If you own real estate, there may be an occasion when a neighbor, contractor, or someone else seeks a favor. For example, someone may want to temporarily use or pass through your property. When someone seeks to use your real estate for only a short period of time, you may think a simple handshake agreement is good enough. In many or most cases, the handshake deal does not offer sufficient protection to the property owner. In such an instance, a written license agreement may be the best option for the landowner.
The following is an example of what could happen without a license agreement:
Neighbor asks: “We will be renovating our building and surrounding property for the next two weeks. Would it be ok if our employees park in your lot during this time period?”
Owner of Parking Lot answers: “No problem. Your people are welcome to park on the western side of our lot.” Hand shake ensues and the deal is made.
The following week, one of the neighbor’s employees slips and falls on a patch of ice when exiting her car. The employee sues the property owner for failing to properly maintain the parking lot. Regardless of whether the property owner is found liable for that employee’s injuries, the original “handshake” agreement has just become an unexpected lawsuit. To avoid such a nightmare, the parking lot owner should have required the neighbor to enter into a written license agreement with certain landowner protections, such as an insurance and indemnity clause.
What is a license agreement?
In real estate, a license agreement is a voluntary grant of personal privilege that allows the user (“licensee”) to use the property of the landowner (“licensor”) subject to certain terms and conditions. Black’s Law Dictionary defines a license as, “The permission by competent authority to do an act which without such permission, would be illegal“.
In general, licenses tend to be for shorter periods of time and are usually revocable, meaning the licensor can terminate the license upon notice to licensee. The idea is that the licensee is using the property with permission and subject to certain terms. The licensee may or may not compensate the licensor for its use depending on the deal reached by the parties. Additionally, license agreements typically are much shorter than a lease and therefore less expensive to produce.
What are the benefits of a license agreement?
Generally, as a personal privilege, license agreements can be terminated at the will of the licensor. Because license agreements are usually revocable, they typically are not recorded and therefore do not impair record title.
Another important consideration is that a license agreement typically includes terms to protect the landowner. For example, a well drafted license agreement should contain insurance and indemnification clauses to protect the licensor from liability. The license agreement should require the licensee to maintain liability insurance, and it should shift the risk of liability to the licensee by requiring the licensee to indemnify the licensor for any and all damages that occurred from its use of the real estate.
License agreements also provide licensees with a clear understanding of where and what they can do on the property of the Licensor. This clarity helps the parties avoid future disputes and costly litigation. It also protects the Licensee from a trespass or nuisance claims if the relationship with the Licensor goes south.
In the parking lot example, the licensee should have been required to maintain comprehensive liability insurance and to indemnify the parking lot owner from any and all claims made by any of its employees relating to their use of the lot. If this had been done, the licensor would have been more protected from the risk of the injured employee.
When is a license agreement not enough?
A license agreement is merely a contract and does not transfer a real property interest. In contrast, an easement is an irrevocable interest in land of potentially perpetual duration. Therefore, someone who is going to make a substantial investment in property owned by another should seek an easement or long-term lease rather than a license.
If you have any questions about leases, license agreements, easements, or other real estate issues, please contact Charlie Katz-Leavy of Verrill Dana LLP.
Original article posted in the August 30 – September 12, 2013 edition of the Mid Atlantic Real Estate Journal