Got a parking lot you don’t use after employees leave at 5 p.m.? Large meeting space in a building you never touch on a weekend?
You might want to consider licensing that space to another user. Not only can you earn extra income, utilizing a license allows property owners tremendous flexibility in the terms of the deal.
In the past few months, we have seen an uptick in the number of requests for licensing agreements for commercial property. A license is not a lease, which is a contract that transfers an interest in a piece of property to a tenant, giving that tenant possession and exclusive use of the property for a defined time period, subject to certain stipulations.
A license also is not an easement, which grants the easement holder an interest in the property that follows that property when it is transferred. Instead, in a licensing arrangement, the owner of a piece of property allows someone else to use the property for a specific purpose without granting a permanent interest.
Unlike a lease or an easement, a license may typically be terminated at any time by the property owner. Consider a few scenarios:
- A building owner who runs a business from 8 a.m. to 5 p.m. during the week has a parking lot that sits empty at night. A neighboring business that operates during evening hours might approach the owner for permission to use the parking lot for overflow parking.
- A building owner approached by a business leasing space in a neighboring building to run cable adjacent to the sidewalk to expand its internet operations.
- A building owner approached by a nonprofit to hold a special fundraising event in its unique location.
- A building owner with empty office space approached by another party who wants to store equipment or files in the empty space.
In all of these examples, the property owner should consider licensing the property rather than leasing or granting an easement, particularly if the owner is concerned about the impact a leasehold or easement interest will have on the property's value, marketability or ability to expand future operations.
Seven provisions to consider
Property owners need to ensure their rights are safeguarded in each of these scenarios. They don’t want to be responsible for what happens from 5 p.m. to 8 a.m. when they are not using their property, nor do they want to be held liable for an accident at the fundraiser.
A good license agreement, therefore, will have a number of key provisions and considerations, including:
Licensed area: Be sure to clearly define the area of the property that the licensee is allowed to use.
Term: Clarify what period of time the licensee is allowed to use the property and require the property be returned in its original condition, repairing any damage. Be sure to include a provision that allows the property owner to be reimbursed for any required repairs.
Termination: Spell out the situations in which the license will terminate. For example, if the property is sold or the party breaches and fails to cure the breach, spell out the lease will end after a 30-day notice.
Insurance: Require the licensee to have general liability insurance on the property — and name the licensor as an additional insured. Be sure to confirm the licensee has insurance on his or her own property.
Indemnification: Require the licensee to indemnify and hold the owner harmless from and against any and all liabilities or damages associated with the licensee's use of the property.
Maintenance: Spell out who’s responsible for maintenance and repair of the property. In most cases, the licensor will allow the licensee to use the property only in its “as is” condition and will not be responsible for any repairs or maintenance.
Rules and regulations: Be sure to require the licensee abide by all the rules and regulations the licensor has set forth regarding the property.
Kelly M. Clum-Matthysse is senior counsel at Warner Norcross & Judd LLP where she practices in all areas of commercial real estate law, including commercial lease negotiations, real estate sales and acquisitions. She can be reached at firstname.lastname@example.org.