The Use and Occupancy License Agreement

The goal of the so called "use and occupancy" or "leaseback" agreement is to avoid creating a leasehold tenancy and the associated complex of legal rights and obligations. In order to succeed in this goal, the agreement between the parties must create a mere license for the use and occupancy of the premises, and not any form of leasehold tenancy.  "Whereas a lease conveys an interest in land and transfers possession and exclusive right of occupation, a license does not grant possession but only the right to use the premises.”  The distinction between the right to “possess” land, versus “only the right to use the premises” may seem tricky - because it is. To help clarify the distinction, it may help to consider that a “license” (in the legal meaning of the term) may apply to a wide variety of circumstances- from the right to use space at a gas station to sell Christmas trees, to the right to enter a theater conferred by a ticket.  As another example, a guest of the owner of a house is a licensee- having been invited to use the premises for a specific purpose, such as to housesit for week while the owners are on vacation.  Obviously, a house-sitter is not granted the exclusive occupation of the premises.

Considering the delicate distinction between a lease which transfers "possession", and license which grants "only the right to use the premises,” it is important for the parties to such an agreement to ensure that the agreement is only a license to use and occupy, and nothing more. As a preliminary matter, it's probably not a bad idea to refer to and title the agreement between the parties as "a license for the limited use and occupancy" of the subject premises, rather than simply a "use and occupancy" agreement.  However, it has been held that "the mere fact that such terms as ‘lease’ or ‘rent’ appear will not control the true nature of the contract”- and conversely, the absence of such terms would not preclude a contract from being construed as a lease, if the underlying nature of the agreement created leasehold rights . In the event of a dispute, whether an agreement creates a lease or license may be determined by a number of factors, including: a) the extent of the parties’ control over the premises; b) the language of the agreement; c) the intent of the parties; d) the duration of the expected occupancy; e) whether usage payments are made on a day to day basis; f ) whether the occupant is free to leave at any moment.

Further complicating the license for "use and occupancy" between buyer and seller is the principle that "a license is revocable at the will of the possessor of the land, and the corollary that "the licensee's right to occupy the premises is [revocable] at any time by entry or demand for possession [by the owner of the property]."  So neither party has much security under a "U&O" license because the licensee may leave at any time, and the new owner may revoke the license at any time by demanding possession. Why would the parties agree to such an arrangement, which is essentially a temporary invitation to use the property, but not to retain the right of exclusive possession of the land? As BJ has pointed out, for the sake of facilitating relatively complicated or difficult transactions, or simply for the convenience of the buyer or seller. Despite the relatively volatile legal nature of the U&O license, in practical terms the grant of a U&O license within the context of a property transaction often makes sense for the parties because of the good will engendered by shared goals and positive communication between the parties.

In fact, it is the very fluidity of the legal situation under a U&O license that makes it desirable from the perspective of the new owner who permits the old owner to remain for a short period of time to facilitate the seller’s own plans. If the occupant under the U&O license refuses to vacate the premises on the appointed date, the property owner would not be subject to the laws governing landlord and tenant , which provide for strict protections of tenants and time consuming procedures to effect an eviction. Thus, under a true U&O license, the property owner might seek an emergency court order directing the offending party to vacate the premises immediately, rather than being required to follow the cumbersome procedures for eviction of a tenant through the summary process action.  

Similarly, in handling any holdback funds retained to ensure the timely departure of the use and occupiers, the property owner would not be subject to strict rules for the handling of security deposits, which under Massachusetts law require deposit in an interest bearing account, completion of a statement of conditions, and carry treble damages for incorrect handling of the security deposit. By creating a license and not a lease, the property owner also avoids numerous other dangers, including further risk of treble damages under MA GL c. 93A in disputes with tenants, and a potential obligation to ensure strict compliance with the state health and building codes prior to completing an eviction.

The successful creation of a U&O license, instead of a lease, makes it easier for a buyer to allow the former owner of the recently purchased property to retain possession for a short period of time, without taking on all the risks and burdens associated with the landlord – tenant relationship. Likewise, it may give a seller who has already vacated the premises a bit more peace of mind when contemplating whether to allow a buyer to take possession prior to actually paying for the property. In many cases, especially where a degree of trust and goodwill exist between the parties, the U&O license can be an important ingredient in a smooth transaction.