What Is a Licensing Agreement?
Licensing Agreement Definition
Licensing agreements are contracts between two parties for license, or temporary use of a property, in return for a licensing fee.
The contracts convey some of the rights of ownership of the property from licensors – the party that owns the property – to the licensee – the party that uses the property.
Licensing agreements are most often used for intellectual property. Some examples are:
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Licensing Agreement Example
For example, a movie studio might license copyrights for its characters from a popular movie to a toy manufacturer for making action figures that can be sold in the market.
Or, a pharmaceutical company might license a drug patent to a third-party manufacturer in a cheaper location to reduce costs.
Licensing agreements can also be used in real estate in place of leases.
The renter or licensee has limited rights in a real estate licensing agreement because a license is “revocable”at the licensor’s will.
This means a licensor, or landlord, can remove a defaulting renter, or licensee, without court help and using their own means.
Co-working spaces use licensing agreements to rent out their real estate to companies.
Licensing Agreement Contents
Licensing agreements typically include the following points:
- Information about whether the licensee has exclusive use of the property or if they are sharing it with others.
- Details about royalty payments made by the licensee to the licensor.
- Information about geographies where license is applicable.
- Transfer details about the license and whether it can be resold.
Licensing agreements can almost transfer property ownership from one party to another.
For example, an exclusive, royalty-free, worldwide, perpetual and freely-transferable license grants almost every right of the licensor to the licensee.
But that transfer is not absolute.
Responsibility for protection and maintenance of the property still lies with the licensor.
Licensing Agreement Property & Assets
Licensing can look a lot like purchasing an asset.
For example, an exclusive, royalty-free, worldwide, perpetual and freely transferable license conveys almost every right of the licensor to the licensee.
But there are still some important differences:
- By still owning the property, the licensor does not experience a capital gain from the sale of that asset, and
- Property must be protected and maintained, that responsibility still ultimately lies with the Licensor, as it will be their responsibility to replace any lost or damaged property licensed to another.
Licenses are assignments of property from one person to another.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.