Renewable energy companies, such as those that focus on wind and solar energy projects, should take a close look at the occupancy agreements they use to acquire rights from landowners to install their wind turbines, solar panels, etc.

Is It a Lease or Is It a License?

Despite the label at the top of the document, the intent of the parties, as indicated by the substance of the agreement, dictates the type of agreement. Treatment of real property interests differs by state, but the example of New York law demonstrates the importance of clarifying the rights at the outset.

A lease grants a real property interest and is the surrender of exclusive possession and control of specific real property to another, whereas a license does not grant a real property interest; rather, it grants a personal and non-exclusive right to another to use specific real property. The characterization of a lease or a license matters for a number of significant reasons, as set forth below. In most cases, it is advantageous for a wind or solar energy company to enter into a lease with a landowner, as opposed to a license.

First, the distinction matters with respect to termination and eviction rights. In connection with a lease, property owners must comply with eviction proceedings to terminate a lease prior to the expiration of the lease term. A license is generally less protective of the property user’s interests because it is revocable at will by the licensor and is not assignable. However, in New York, property owners must still comply with New York Real Property Actions and Proceedings Law §713 to implement a revocation of a license, but it is far less burdensome than eviction requirements.

Second, the distinction matters with respect to the availability of Yellowstone injunctive relief under New York law [First Nat’l Stores, Inc. v. Yellowstone Shopping Ctr., Inc., 21 N.Y.2d 630 (N.Y. 1968)]. A Yellowstone injunction refers to the equitable relief afforded to a commercial tenant to toll a cure period under a written lease. If granted, it puts a hold on a landlord’s attempt to evict a tenant while the parties litigate whether the landlord has legitimate grounds for eviction. As a general rule, a court will not grant a Yellowstone injunction to a licensee.

Third, the distinction matters with respect to exculpation from negligence. Pursuant to New York General Obligations Law §5-321, any clause in a lease in which the landlord exonerates himself from liability to his tenant for damages resulting from the landlord’s negligence is void against public policy. This provision is inapplicable to a license, and there is no analogous provision forbidding the exculpation of licensors.

Lastly, the distinction matters with respect to bankruptcy. Pursuant to §365(a) of the Bankruptcy Code, a bankruptcy trustee “subject to the court’s approval, may assume or reject any executory contract or unexpired lease of the debtor.” Under §365(h) of the Bankruptcy Code, if a landlord’s bankruptcy trustee rejects an unexpired lease, the tenant may either treat the lease as terminated, or keep its real property interest—and possession of its premises—while forgoing the landlord’s covenants in the lease. There is no provision analogous to Section §365(h) for licenses. As a result, if a licensor becomes a debtor and rejects the license, courts would likely find that a licensee has no further rights under the license and must end its use of the real property.

For these reasons, if a company is going to spend considerable time and expense to install renewable energy fixtures and equipment on another party’s land, it should consider the implications an occupancy agreement will have depending upon whether it is construed as a lease or a license. If you want an agreement to be a lease, make clear that the property user has an exclusive right of possession for a specific area.