Tenant Leasing Illustrated – June 2016 – Poetic License

Poetic License

The Kentucky Derby is called the two most exciting minutes in sports.

May not sound very long, but you could add up all the exciting moments in commercial leasing this year and you would probably not break two minutes.

A couple of weeks ago, the favored horse, Nyquist, won the Kentucky Derby, the first leg of the Triple Crown.

Nyquist, like 2015 Triple Crown winner American Pharoah, is a 5th generation descendant of Triple Crown winner Secretariat, and is named after Gustav Nyquist, a Detroit Red Wings hockey player.

What does hockey have to do with horse racing? Sounds like a Rodney Dangerfield joke (“I don’t get no respect. I went to a prize fight and a hockey game broke out …”).

But if you are wealthy enough to own a race horse, you have license to name it whatever you like.

Actually, that is not entirely correct. It turns out that there are specific and complicated naming rules set by the Jockey Club, the organization that registers thoroughbred horses.

Names must meet certain criteria, such as not being too commercial or vulgar, being 18 letters or less and iksnay on copying the names of other famous horses.

Examples from this year’s Derby included Trojan Nation (USC Trojan fans), Suddenbreakingnews (Breaking News was taken), Oscar Nominated (mom was Divine Actress and grandfather was Theatrical) and, of course, Nyquist.

Although commercial leasing attorneys do tend to wax eloquent, and I admit that on occasion my lease provisions read like a good romance novel, my licenses tend not to be as poetic as a thoroughbred’s name.

They can, nevertheless, be important.

Tenants may on occasion have in certain contexts a need or desire to license a portion of their premises to a third party.

For example, tenants often negotiate the right to license, upon notice but without landlord consent, an agreed upon portion of their space (e.g., 10%, 20%) to “desk space users”. A newsletter topic in and of itself, these licensees are generally parties with whom the tenant has an ongoing business relationship and who occupy space that is not separately demised in a space sharing arrangement, such as a law firm or accounting firm licensing some offices to an outside professional.

Another example is a tenant with a particular amenity, such as an auditorium, conference center or terrace, which obtains the right in its lease to license such space for charitable or marketing events or even to rent the space out for profit to third parties.

In such event, as with a sublease, the tenant becomes the “lessor” and will want to memorialize the arrangement (and its landlord will want to see such arrangement memorialized) in a written agreement.

A license agreement provides a lesser possessory right than a lease or sublease, but sets forth the parties’ relative rights and obligations much like a sublease.

On a cautionary note, the more a license walks like a sublease and, in this case, neighs like a sublease, the more the courts in New York (and many other states) will treat the relationship as that of sublandlord and subtenant, providing the licensee with many of the same protections as a subtenant.

As you head into the home stretch, work with your attorney to craft a license agreement that protects you by covering the following eight issues:

  • Specify the rights granted. Grant the licensee a non-exclusive license to use a specified portion (or portions) of the premises, such as a particular office or set of offices, and perhaps other designated areas, such as conference rooms and lunch room.

As a corollary, you should specifically provide that the license does not constitute a lease, create any interest in the space or any landlord-tenant relationship (or joint venture or other relationship).

  • Indicate the license terms. As with a sublease, your license needs to set forth the primary business terms of the arrangement, e.g., term, consideration, etc.
  • Focus on services and shared space. Most licenses involve some form of space sharing and services and these tend to be complicated and need to be quantified to avoid later disputes.

○ Some services are provided through your landlord (e.g., heat, air conditioning, electricity) and may or may not be included in the license fee; even if included, your licensee needs to be responsible for overtime and other costs for extra services passed on to you by your landlord.

○ Some services will involve the sharing of the space, such as use of conference rooms, messengers, receptionist and other office services. If there is to be a separate fee, it should be clearly stated. Even if there is no fee, a procedure for reserving conference or other facilities (e.g., first come, first served) and applicable limitations on use should be addressed (as well as other general rules and regulations for the use of the available services at the space).

  • Require adequate insurance. No differently than with a subtenant, a licensee must provide adequate commercial general liability and other insurance naming you (and your landlord and other appropriate parties) as additional insureds. You should consult with your risk management/insurance advisors to ensure proper protection and that the license meets the requirements under your lease
  • Require indemnification. Again, as with a subtenant, your licensee should indemnify and hold you harmless (including attorneys’ fees and costs) from losses due to your licensees’ alleged acts, omissions, negligence and willful misconduct (and those of its agents, contractors, etc.)
  • Include licensee covenants. Your licensee should covenant to comply with all applicable requirements of law and all terms and conditions of your lease. The licensee should also agree not to make any alterations or modifications to the space without your consent and specifically waive any right to sublicense or assign its rights under the license
  • Require subordination. Make the license subject and subordinate to your lease and each mortgage, superior lease and other matter to which your lease is subordinate, including a licensee obligation to deliver certificates evidencing such subordination
  • Include standard sublessor provisions. As an occupant, it will likely be no less difficult to enforce remedies against your licensee if it defaults than it would be with a subtenant, so provide specific default provisions, penalties for holdover, obligations to repair damage and other standard protections.

A horse is a horse, of course, of course, and as a lifelong city slicker, the closest I have ever gotten to a thoroughbred was Mister Ed (yes, I know, another reference confirming my creaky ancientness). But as a commercial leasing lawyer with some (limited) horse sense, I can assure you that if you address the eight issues above in your license agreement, you will increase the odds that you end up in the license agreement winner’s circle.