Michael Polentz, co-chair of the real estate and land practice group at Manatt, Phelps & Phillips LLP

PALO ALTO, CA—Nick Jones and Michael C. Polentz of Manatt, Phelps & Phillips LLC review the question of whether an agreement described as a lease does in fact create a legal tenancy is often litigated in California courts, and a court's decision on whether a landlord-tenant relationship exists can have significant consequences on the rights and remedies of the parties. In the exclusive commentary below, the co-chair of real estate and land use practice group, along with Jones, an associate, say that “The existence of a tenancy can trigger the requirements of (and potential penalties associated with) the Subdivision Map Act or cause the levying of possessory interest tax, and a court's characterization of an agreement to use real property can impact a wide range of legal issues, from tort liability to eminent domain.”

The views expressed in the commentary below are Jones' and Polentz' own.

With less traditional arrangements such as co-working office spaces becoming increasingly prevalent, the line between leases and contractual arrangements that do not create a possessory interest in real property, such as licenses, can sometimes be difficult to determine. Parties may even attempt to capitalize on the lack of a clear dividing line between leases and licenses by drafting agreements that attempt to secure a combination of some of the benefits of tenancy and some of the benefits of a license.

In deciding how to characterize an agreement, courts consider the language used by the parties in the applicable agreement including: referring to the parties as “landlord/lessor” and “tenant/lessee,” characterizing payment as “rent,” and expressly indicating that the agreement is a “lease.” However, it is not sufficient for an agreement to merely employ the terminology of a lease. Courts will also look to whether the parties displayed the intention of creating a landlord-tenant relationship; however, the structure of the agreement alone is not necessarily dispositive. When determining whether parties intended to create a landlord-tenant relationship, courts focus heavily on “exclusivity of possession” (a formulation describing the level of exclusivity required for a tenancy, in which a tenant holds exclusive possession of the premises “against all the world,” including the owner of the premises). If the owner of the premises retains the ability to enter the premises or a part of the premises at will, the would-be tenant may not have exclusive possession.

For example, a California court determined that an agreement between a city and a local sports club was not a lease because the city retained possession of a portion of the premises . Under the agreement in question, which employed lease terminology, the sports club “leased” the city's stadium for home games. The court determined, however, that because the city operated concessions and parking facilities on game days and also provided security, the sports club did not exercise exclusive possession of the premises. Relying upon this conclusion, the court held that the agreement did not create a tenancy.

A putative tenant's level of control over the premises is another important factor courts consider. Although most leases include some restrictions on a tenant's use of the premises, such as whether tenant-built improvements are permitted, an agreement with broad restrictions on the use of the premises may cast doubt on whether the agreement grants sufficient control over the premises to constitute a lease. More specific restrictions on the use of the premises such as (i) restrictions setting the price a tenant must charge for certain goods or services provided on the premises or (ii) restrictions determining for whom a tenant may provide services, have lead some courts to characterize an otherwise straightforward lease as something less because of a determination that the restrictions do not allow for the creation of a legal tenancy in favor of the tenant.

Ultimately, savvy owners and occupiers of realty should consult closely with their attorneys to ensure that the language in an applicable agreement is sufficient to create, or not create as the case may be, the tenancy and/or relationship intended.

Manatt, Phelps & Phillips LLP

The views expressed in the commentary below are Jones' and Polentz' own.

Instant Insights /

Does “Lease Language” Create a Lease?

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