Court Finds Actual Nature of the Contract Controlled

Both a lease and a license create estates in the property. But there is a distinction with a difference. A tenant under a lease (but not a licensee under a license) is protected by General Obligations Law Sections 5-901 and 5-905—which require a landlord to give a tenant between 15 and 30 days prior written notice of the expiration of a right to renew or cancel the lease. And, as a recent case illustrates, the substance of the contract and not the label attached to the agreement is dispositive— and triggers a case and fact-specific inquiry…

Solomon & Cramer LLP is a three attorney litigation boutique. The firm asserted that it entered into a lease with Times Square Suites LLC on February 3, 2017—but the agreement was labeled a license agreement. The firmed claimed that the lease contained an automatic renewal clause which stated that “Upon expiration of the initial term, or any extension thereof, the term of this agreement herein shall be automatically extended for the same period as the initial term, upon the same terms and conditions as contained here, unless either party gives notice to the other in writing to the contrary at least ninety (90) days prior to the end of the term”.

The firm maintained that, on February 12, 2018, it entered into a letter agreement in which it agreed to renew for an additional year (through February 28, 2019) on the conditions that the rent would not be increased, with the right to terminate the lease prior to the end of the lease.

The firm remained in the space after the termination of the lease but continued to pay the monthly rent (it argued that the lease became a month-to-month tenancy ). And gave notice of its intent to terminate the lease effective February 28, 2021.

Times Square contended that the license agreement continued through February 28, 2022, pursuant to the automatic renewal clause And that the agreement was not a lease and the firm was not entitled to the protections afforded to tenants.

The firm argued that the General Obligations Law has requirements about lease renewals that Times Square did not follow. So, even if there was an automatic renewal, it was void under that statute. The firm removed its property on February 17, 2021, but Times Square sent an invoice for $2,200 (for rent in March 2021).

The firm moved for summary judgment. And asserted that Times Square tried to debit money from the firm’s bank account after the surrender of the premises and then refused to return the $3,600 security deposit. The firm also asserted that Times Square did not give the proper notice for the lease renewal.

Times Square cross-moved for summary judgment. Argued that the agreement was a license, not a lease. And claimed that the firm was permitted to enter the property but never developed a possessory interest in the premises. So Times Square was not a landlord, and the G.O.L. notice provisions did not apply. And if the Court nevertheless found that the agreement constituted a lease, the firm waived its right to receive renewal notices.

The central dispute was whether the agreement was a license or a lease. A document calling itself a `license’ was still a lease if it granted not merely a revocable right to be exercised over the grantor’s land without possessing any interest therein but the exclusive right to use and occupy that land.

The nature of the transfer of absolute control and possession was what differentiated a lease from a license. A license connotes the use or occupancy of the grantor’s premises. But a lease grants exclusive possession of designated space to a tenant, subject to rights specifically reserved by the lessor. A license is cancellable at will and without cause. The critical question in determining the existence of a lease was whether exclusive control of the premises was passed to the tenant.

Any assessment of whether an agreement was a license or a lease inevitably required the Court to review the terms of the agreement. The agreement here stated that the “Licensee is hereby granted a license to use the Unit within the Premises on an exclusive basis and shall have access thereto twenty-four (24) hours a day, seven (7) days a week… In addition, Licensee will have use of the common area of the Premises facilities on a non-exclusive basis in accordance with the rules and regulations promulgated with respect thereto”.

The Court found that the agreement was a lease rather than a license. The agreement specifically provided exclusive access to a specific unit within the building and referred to the firm’s ability to use a common area on a non-exclusive basis. That connoted a lease: the firm paid monthly rent for designated office space, it had 24-hour, 7 days a week access to the Unit and the agreement created a distinction between exclusive access to the Unit and non-exclusive access to other areas. Unlike shared co-working spaces, the agreement did not detail a situation where the firm merely had access to “general” office space at its convenience.

That the agreement repeatedly stated that it was a license and did not create a possessory interest was of no moment. Because the undisputed fact was that the agreement gave the firm a designated and exclusive office space with around-the-clock access. Because the Court found that the agreement was a lease, it also found that the firm was entitled to receive the required notices under the General Obligations Law. It was undisputed that Times Square did not send these required notices. And, instead, Times Square claimed that the firm somehow waived its right to receive those notices because it did not complain when the agreement was extended in 2018, 2019, and 2020.

That argument was without merit. The firm argued that it entered into a letter agreement for 2018—therefore, the Court was unable to find that a laches-type argument could apply to that year. And the Court could not find that the firm waived its right to receive notice based on two years in which it apparently did not complain about the lack of notice. During those two years, the parties were apparently happy—the firm kept paying the rent and stayed on the premises. There was no reason to complain about a lack of notice. And Times Square did not cite any binding case law in support of the claim that a tenant could waive its right to those notices after two (or even three years).

The Court declared that the lease ended on February 28, 2021, and the firm was entitled to the return of the security deposit.