11 September 1998 GST/HST Interpretation HQR0001263 - Your File : Lease or Licence

                                                                        GST/HST Rulings and Interpretations
                                                                                                Directorate
                                                                                                Place Vanier, Tower C, 10th Floor
XXXXX                                                                                 McArthur Road
XXXXX                                                                                 Vanier, Ontario
XXXXX                                                                                 K1A 0L5

Dear XXXXX

Thank you for your letter of July 22, 1998 (with attachments) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to a contract to operate food concessions at various municipally owned venues.

Facts

1. XXXXX has entered into an agreement with XXXXX (City) to provide food and beverage services at various parks and recreation facilities owned by the City.

2. The agreement is to run for XXXXX years except insofar as it applies to the XXXXX, where it will run on a year to year basis for up to XXXXX years.

3. It is a condition of the agreement that XXXXX make XXXXX in what are described as "leasehold improvements", most of which are in respect of the Conservatory facility.

4. In addition to the leasehold improvements, XXXXX is to pay to the City a percentage of sales revenues. The payments are to be made monthly and are described as "rent".

5. The tender includes the following obligations to be carried out by XXXXX

(a) maintain insurance on the property and include the City as an insured;

(b) pay all taxes and licence fees;

(c) a menu and prices must be submitted to the City for approval;

(d) provide a good standard of service and value to the general public;

(e) provide sufficient qualified supervisory to staff the facilities;

(g) ensure that handling and sale of food and alcohol complies with legal requirements;

(h) maintain cleanliness in all food service facilities except golf course dining area;

(i) maintain kitchens and food preparation equipment regardless of who owns it;

(j) pay for all utilities provided by the City except water and sewer.

6. The City has the following obligations:

(a) provide the space and furniture, fixtures and smallwares at each facility;

(b) provide electricity, water and heat at all locations except the XXXXX[;]

(c) paint and decorate the facilities as it deems necessary.

Interpretation Requested

You have asked for our view as to whether this contract involves the making of an exempt supply of property by way of lease or a taxable supply of real property by way of licence.

Interpretation Given

Based on the information provided, the contract between XXXXX and XXXXX involves the making of a supply of property by way of licence and not by way of lease.

Explanation

The following factors are of assistance in characterizing this agreement as a lease or licence:

1. the intention of the parties;

2. exclusive possession;

3. legal interest in land;

4. right to assign or sublet; and

5. form of the agreement.

Intent of the Parties

In essence, the agreement between XXXXX and XXXXX is a contract to have XXXXX operate various food concessions that are owned on behalf of the City. The provisions of the agreement are intended to ensure that the operations conducted by XXXXX conform to the expectations of the City, and allow the City to dictate key management functions such as staffing levels, prices and hours of operation. These specifications are extremely detailed in every respect and go well beyond the provisions that would normally be found in a lease. This supports the conclusion tha XXXXX is being given a right or privilege to enter upon the grantor's land for a specified purpose, which according to Policy Paper P-062, "Distinction Between a Lease Licence and Similar Arrangement", denotes a licence rather than a lease.

Exclusive Possession

The agreement appears to confer on XXXXX a limited right to occupy rather than exclusive possession. The agreement does not exclude the City from the facilities occupied by XXXXX and in fact, the City's right to judge the cleanliness, neatness and appearance of the facilities may imply a right to enter on the premises. The City also reserved the right to grant other non-profit organizations the privilege of supplying food and beverage services for certain events.

Legal Interest in Land

The agreement does not appear to grant XXXXX any legal interest in land. There is no covenant for quiet enjoyment of the property and no legal description of the properties.

Right to Assign or Sublet

The agreement is silent on the issue of whether or not XXXXX can assign or sublet the contract. The tender documents did include provisions for subcontracting "Work", however, it is not clear from the context of the documents whether the "Work" relates solely to the construction of leasehold improvements or whether it can also include the actual operation of any of the facilities. In any event, the tender documents indicate that the successful bidder for the contract was to have certain minimum levels of experience and resources. These requirements make it unlikely that XXXXX has an unfettered right to assign the contract or sublet the premises to another party.

Form

The format of the tender documents contain elements of both a lease and a licence. It refers to the improvements that are to be provided by XXXXX as "leasehold improvements" and it refers to the percentage of sales that are payable to the City as "rent". The countervailing arguments are that the parties are not described as landlord and tenant, and, as already indicated, there is no covenant for quiet enjoyment or other similar language that often signals a leasing arrangement.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-4393.

Yours truly,

Michael Ezri
A/Rulings Officer
Real Property Unit
Financial Institutions & Real Property Division
GST/HST Rulings and Interpretations Directorate