When is it a Lease or a License Agreement in California Real Estate?

This issue was explored in the recent case of Castaic Studios, LLC v. Wonderland Studios, LLC.

Plaintiff Castaic Studios, LLC (Castaic) and Wonderland Studios, LLC (Wonderland) entered an agreement under which Castaic granted Wonderland the “exclusive right to use” certain areas of its commercial property.

The agreement specified that it was a “license agreement,” as opposed to a lease, with Castaic “retain[ing] legal possession and control” of the premises.

The agreement was to be “governed by the contract[] laws and not by the landlord tenant laws.”

When Wonderland defaulted, Castaic nonetheless filed an unlawful detainer action seeking possession of the property.

The trial court sustained Wonderland’s demurrer without leave to amend, reasoning that Castaic had waived its right to pursue the remedy of unlawful detainer.

This was correct, so the appellate court affirmed.

Castaic owns a commercial property in Castaic, California. In October 2021, Castaic entered a “License Agreement” with Wonderland, under which Castaic granted Wonderland “the exclusive,” but “non-possessory” right “for the use of” the property, with the exception of a stage area and storage building.

The agreement afforded Wonderland 35 consecutive one-month options to extend. To exercise these options, Wonderland was required to timely make all payments owed and to send Castaic a letter of intention to extend the term for the next period at least 20 days before the end of the current month.

In July 2022, Wonderland was in default of the payments owed and failed to timely send a letter of intention to extend the term for August of 2022 as required.

Therefore, Castaic alleged the agreement expired by its own terms as of July 31, 2022.

On July 13, 2022, Castaic sent Wonderland an email notifying Wonderland that it was in default.

Section 6 of the agreement states it was not a lease or any other interest in real property. It was a contractual arrangement that creates a revocable license. Licensor retains legal possession and control of the Premises and the areas assigned to Licensee. Licensor has the right to terminate this Agreement due to Licensee's default.

Section 13.3(a) provides that if Wonderland defaults, Castaic may immediately terminate Licensee’s right to use of the Premises by any lawful means, in which case Licensor’s obligations under this Agreement shall immediately terminate and Licensor shall have option to immediately take over use of the Premises from the Licensee.

Section 29 provides, “[t]his agreement will be governed by the contract[] laws and not by the landlord tenant laws.”

Castaic filed its complaint for unlawful detainer against Wonderland on August 22, 2022, seeking possession of the property and unpaid “rent.”

Wonderland demurred on the grounds the agreement expressly states it is not governed by landlord-tenant laws and the three-day notice Castaic served on Wonderland did not contain the information that Code of Civil Procedure section 1161(2) requires before the filing of an unlawful detainer action.

The trial court sustained the demurrer without leave to amend.

Relying on sections 6 and 29 (designating agreement as “revocable license,” “not a lease,” and governing law as “contract[] law,” not “landlord tenant law”), the court concluded that Castaic had waived its right to pursue the remedy of unlawful detainer.

The court reasoned Castaic has not alleged and cannot allege a relationship between it and Wonderland that would allow Castaic to pursue an unlawful detainer action against Wonderland.

The trial court also observed that even if Castaic could state a claim under the unlawful detainer statute, Castaic failed to comply with the statutory notice requirements set forth in Code of Civil Procedure section 1161(2).

Castaic asserted that the trial court erred in sustaining Wonderland’s demurrer without leave to amend, arguing that despite express designation of “contract[] laws” and disavowal of “landlord tenant laws” as the governing law, the agreement did not preclude Castaic from resorting to the summary proceedings of unlawful detainer.  

The fundamental goal of contract interpretation is to give effect to the mutual intention of the parties as it existed at the time they entered into the contract.

When the contract is clear and explicit, the parties’ intent is determined solely by reference to the language of the agreement.”

The words of the contract are to be understood in their ordinary and popular sense.

The principles of contract interpretation apply equally to leases as to any other kind of contract.

Anyone may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement.

Unlawful detainer is a remedy available to a landlord against a tenant who breaches a lease and is intended and designed to provide an expeditious remedy for the recovery of possession of real property.

Whether an agreement constitutes a lease or a license is “a subtle pursuit.”

Although Castaic argued at length that the agreement was in fact a lease despite its express designation to the contrary, the appellate court did not need to decide this issue to resolve the appeal.

Even assuming the agreement contains some elements of a lease, its express terms show the parties’ intent to waive any rights afforded by the landlord-tenant laws, including a landlord’s remedy of unlawful detainer. That is what the trial court concluded, and the appellate court agreed.

The parties’ intent to avoid application of landlord-tenant law is evinced by Castaic retaining “legal possession” of the premises. Simply put, the parties unmistakably recorded their intent to forego the application of laws specific to landlord tenant relationships.

On appeal, Castaic urged that the parties may not elect to contract around particular statutory protections.

But Castaic did not cite a single authority that supports this position. Nor did Castaic argue that the parties’ election to disavow the applicability of landlord-tenant laws violated any public policy.

A bedrock principle of contract law in California has always been that competent parties should have the utmost liberty of contract to arrange their affairs according to their own judgment so long as they do not contravene positive law or public policy.

Because the parties were found to have waived the landlord-tenant laws, no unlawful detainer could be filed.

LESSONS:

1.         The fundamental goal of contract interpretation is to give effect to the mutual intention of the parties as it existed at the time they entered into the contract.

2.         When the contract is clear and explicit, the parties’ intent is determined solely by reference to the language of the agreement.”

3.         The words of the contract are to be understood in their ordinary and popular sense.

4.         The principles of contract interpretation apply equally to leases as to any other kind of contract.

5.         Anyone may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement.