Real Property Law

Unlawful Detainer Actions by Licensors? CA Case Offers Clarity for Short-Term Rentals

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By: J.J. Sherman, Law Offices of J.J. Sherman, P.C. and Myaysa Evans, St. John’s University School of Law

Many property owners choose to forego traditional leases for short-term rentals, opting instead for license agreements. But what exactly is the difference, and how does it impact legal rights? A recent California Court of Appeal case, Castaic Studios LLC v. Wonderland Studios (2023)[1], sheds light on this issue.

Leases vs. Licenses: Understanding the Distinction

Leases and licenses are both legal agreements that grant someone the right to occupy real property.   However, there’s a key distinction.  Under a lease, a tenant is granted exclusive possession of the property for a defined period of time.[2]  The tenant controls who enters and exits the premises, and, generally, the landlord cannot access the premises without permission.[3]  Leases are subject to landlord-tenant laws, which provide specific rights and protections to both parties.

Differently, a license grants the licensee permission to use real property for a specific purpose, but does not convey exclusive possession.[4]  Licensors typically retain control over the property and can access it as needed.[5] Under common law, a mere license is revocable by the licensor.[6] 

In the past, landlords in California assumed that they might have access to the same enforcement rights and remedies under a license agreement as they do under a lease.  However, the recent court decision of Castaic Studios LLC v. Wonderland Studios (2023) challenges that conclusion.

Castaic Studios LLC vs. Wonderland Studios (2023): The Case in Point

This case involved Castaic Studios LLC, who sued Wonderland Studios to recover possession of a property and unpaid fees under a “license agreement.” The parties entered into an agreement under which Castaic granted Wonderland the “exclusive right to use” certain areas of its commercial property.[7] 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 recovery of possession of the property instead of filing an ejectment action.

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.”[8] Therefore, Castaic alleged, “the agreement expired by its own terms as of July 31, 2022.”[9]

On July 13, 2022, Castaic sent Wonderland an e-mail notifying Wonderland that it was in default. Wonderland then attempted to exercise the option even though the time for doing so had expired. Castaic alleged that it did not “serve a notice [on Wonderland] because the agreement expired by its own terms” when Wonderland failed to timely notify Castaic of its intention to exercise the August 2022 option.

The license agreement contained the following provisions: “(1) If Licensee defaults on Licensee’s obligation under this Agreement, Licensee agrees that Licensor may cease to provide … access to the Licensee’s area(s) of use without notice or the need to initiate legal process”; and (2) 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.”

Wonderland argued the agreement wasn’t governed by landlord-tenant laws because it specifically stated it was a contract, not a lease. The court agreed and sided with Wonderland, dismissing Castaic’s unlawful detainer action. The court relied on the provisions in the agreement that stated the agreement was a “revocable license”, “not a lease”, and governing law as “contract law,” not “landlord tenant law.”[10] Therefore, the court concluded that Castaic had “waived its rights to pursue the remedy of unlawful detainer.” After its complaint was dismissed with prejudice, Castaic filed a timely notice of appeal. The judgment of dismissal was then affirmed by the Second District Court of Appeals.

In Practice

The takeaway? While license agreements can be useful for short-term rentals, property owners should be aware of the limitations they impose.  If seeking the full rights and remedies available under landlord-tenant law, a traditional lease agreement might be a better option. Alternatively, in order to avoid the same result of Castaic Studios LLC v. Wonderland Studios,  property owners using a license agreement should add language to their license stating that the licensor expressly reserves all rights to unlawful detainer and other remedies available to landlords under California law.   Conversely, licensees should be aware that, based on the findings in Castaic Studios LLC v. Wonderful Studios, they are unlikely to benefit from the rights and remedies available to tenants under California law, unless they expressly negotiate otherwise in their license agreement.[11]

For more information on this or other commercial real estate law topics, visit the website for Law Offices of J.J. Sherman, P.C.

This communication is for informational purposes only. It is not intended to create an attorney-client relationship or constitute an advertisement, a solicitation, or professional advice as to any particular situation. If this communication is considered advertising, then it is herewith identified as such. This communication does not constitute a guarantee, warranty or prediction regarding the result of representation. Prior results do not guarantee a similar outcome.

[1] Castaic Studios, LLC v. Wonderland Studios LLC, (Nov. 2023) 209, 2nd Dist. Court of App. (holding Castaic was barred from exercising an unlawful detainer action to expel licensee from the property, noting that Castaic had expressly waived its rights to such a remedy.)

[2] California Real Estate Law & Practice § 13 (Matthew Bender & Co., Release No. 133, March 2024)

[3] Id.

[4] Corpus Juris Secundum, Nature of real property license § 147

[5] Id.

[6] Corpus Juris Secundum, Revocation of real property license § 158, (citing Golden West Baseball Co. v. City of Anaheim, 25 Cal. App. 4th 11, 31 Cal. Rptr. 2d 378 (4th Dist. 1994).

[7] Castaic Studios, LLC v. Wonderland Studios LLC, 2nd Dist. Court of App.., at 212. (The License Agreement described the parties as: “This Exclusive License Agreement with option to purchase ‘Agreement’, dated as of October 27th, 2021, made by and between Castaic Studios, LLC, hereinafter ‘Castaic’ or ‘Licensor’; and Wonderland Studios LLC).

[8] Id.

[9] Id.

[10] Id. (Court found it hard to imagine contractual language clearer than that found in section 29: “This agreement will be governed by the contract laws and not by the landlord tenant laws.” The court concluded the parties made explicit their intent that the document was not a lease).

[11] Special Thanks to Skye Langs and Kiana Araghi of Coblentz Patch Duffy & Bass LLP who first presented on this case to the Commercial Leasing Subcommittee of the California Lawyers Association Real Property Law Section.

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