Lease, License or Easement?
John Starkweather | 12.02.19
Clients need to use or let others use real property in ways that occasionally defy easy characterization. Most everyone understands that if you want to occupy a suite in an office building for five years, you sign a “lease”; that you give an “easement” to the utility company to get service to your home; that you occupy a hotel room, parking ramp, or a college football game under a “license.” But what if a company needs its employees to park in its next-door neighbor’s parking lot? Or if a church wants to permit another group to regularly hold meetings in its space? What if a municipality wants to let cell phone providers put antennas on its water towers? And what about billboards? Indeed, any time real property is being used or occupied by someone other than the owner, it is useful to consider whether to use a lease, a license, or an easement.
We consider three basic questions to choose the appropriate alternative. First, is the interest possessory or non-possessory? Second, is the interest permanent or temporary? Third, assuming the interest is temporary, would we expect the occupant to be entitled put the owner through the onerous process of eviction after a default? (Other relevant questions include whether a particular use or occupancy of real property is exclusive or non-exclusive, and transferable or personal.)
A lease is generally intended to be a possessory interest, giving the tenant exclusive occupancy of certain real estate against the rest of the world, including even the owner. Easements, in contrast, are generally intended to be non-possessory interests, granting the use of property for a specific purpose but not occupancy. A driveway easement, for example, merely gives your neighbors the temporary right to use your driveway to get to their garage; but not to build an addition, have a garage sale, or camp out on your driveway. Note, however, that the lines blur. Most leases do not confer strict, exclusive, possession, since landlords usually reserve the right to enter the leased property to inspect, repair, and show it to prospective tenants. And a billboard easement confers a possessory interest, since the sign physically occupies the land.
Easements are generally intended to be permanent interests in real property, whereas leases must end and are therefore temporary. For example, it would be impossible to run an electric utility if leases with each homeowner served had to be regularly renegotiated. (It’s important to note that easements can be abandoned, and can become unenforceable under Wis. Stat. §893.33. So in a sense even easements are not necessarily permanent. But the distinction remains useful.) These lines can be blurred as well, with leases that “automatically” renew, thereby becoming closer to permanent; while easements for construction or grading are sometimes described as “temporary.”
Licenses must be temporary but can be either possessory or non-possessory. A license is not technically an interest in real property, but rather a mere contract right that confers permission to use or occupy real property. Without a license, you’d be trespassing. Licenses are typically revocable. The biggest distinction between leases and licenses is the remedy upon default. Defaulting tenants under leases are entitled to an eviction remedy, which technically allows them to continue in exclusive occupancy despite having defaulted in payment of rent or other lease terms. Eviction is a lengthy and potentially expensive process. Defaulting licensees, on the other hand, can be dispossessed without having to go through eviction: imagine having to evict someone from a hotel, football game, or parking garage.
Parking is a good example of how we work through the three questions. A grocer client had a next-door neighbor that wanted to build a restaurant, but didn’t have enough parking spaces on its own lot to satisfy the requirements of the applicable zoning ordinance. Without additional parking, the local municipality wouldn’t approve construction of the restaurant. The restaurant asked the grocer for a permanent easement. But the grocer wanted the restaurant to pay monthly charges rather than a one-time fee, which raised the possibility of default. Default would terminate the easement, making the interest impermanent. The municipality would have accepted a long-term lease, yet it seemed inapt to have to go through the process of evicting the restaurant for failure to pay for parking. The grocer would have preferred to give a license, but the municipality would not accept that because a license is not an interest in property sufficient to give it comfort about granting the variance. (The parties ultimately settled on an easement subject to termination for non-payment of rent.) Cell phone antennas and billboards can all be done as licenses, leases, and easements, as well as combinations of those, depending on the interests of the parties.
We tend to use easements for interests that are more “permanent” and “non-possessory”; leases for interests that are more “temporary,” “possessory,” and “eviction-appropriate”; and licenses when eviction is inapt. But these are not bright line tests. The characterization of an interest as a lease, license, or easement is not entirely up to the contracting parties to decide. For example, one cannot side-step the onerous requirements of residential leasing laws by having tenants sign license agreements. However, working through the three questions will generally guide you to choosing the correct interest for your situation.
DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.