Lease vs. License
A lease review where the title of the document was "License for Commercial Office Space" was recently reviewed. I have seen leases titled "Indenture," "Agreement," or "Rental Contract" or "Rental Agreement," but rarely seen a lease titled as "License." Ultimately it does not matter what the document is called. Only the content of the document is important. However, the title "lease" or "license" carries certain connotations, and an inappropriate title may cause confusion regarding the rights granted to the user.
A lease is an agreement where the property owner gives another party the right to occupy the property in exchange for consideration. Usually the right is (1) exclusive, (2) for a term of a year or more, (3) transferrable (except as stated in the lease), and (4) irrevocable. The property owner gives up a leasehold interest in the property.
A license is an agreement where the property owner gives permission to another party to use the property for a specific, limited purpose. Usually the right is (1) non-exclusive, (2) for a short term or non-consecutive use, (3) non-transferrable and (4) freely revocable. The property owner does not give up an interest in the property.
The most important distinction between a lease and license is whether the right to use the property may be revoked. A license is more appropriate for a shared, non-exclusive, revocable right to use property. For example, an organization could be given a license to use a meeting room at a university every Monday from 6pm-7pm, or a touring barbeque chuck wagon could be given a license to serve food in a grocery store parking lot one Saturday each month.
Rental vs. license to use real estate
To determine the taxability of various uses of real estate, you need to know the difference between a lease or rental of real estate and a license to use real estate.
Leases or rentals of real estate are not subject to B&O tax or retail sales tax. However, income earned from providing a license to use real property are subject to tax. But how do you tell them apart? Here are some general guidelines:
Rental or Lease
A rental or lease of real estate conveys an interest in a certain designated area of real property. The person occupying the property is granted an exclusive right of continuous possession against the world, including the owner, and the absolute right of control and occupancy during the term of the lease. The agreement must create a landlord-tenant relationship.
License to use
A license to use real estate merely grants a right to use the real property. It does not confer exclusive dominion or control over the property. Under a license to use real estate, the owner typically controls such things as lighting, heating, cleaning, repairing, and opening and closing the premises.
Some licenses to use real estate are taxed as retail sales. For example, sales of lodging by a hotel, rooming house, motel, trailer camp, and similar licenses to use real estate are subject to retail sales tax. However, if the agreement provides for occupancy of the real property for a continuous period of one month or more, it may be presumed to be a nontaxable lease or rental of real estate, but check with your real estate attorney on this.