Sunday, May 12, 2013

Domain Name Lease Agreements Are Like Starbucks Coffee

By Zak Muscovitch.

Try just ordering "a coffee" at Starbucks. You will be met with a litany of questions; Do you want mild, medium, or dark? Brewed or custom made? Fat or non-fat? Wet or dry? Tall or short? Flavor shot or not?

The same goes for domain name lease agreements. There are many possible variations and considerations, and therefore like ordering "a coffee" at Starbucks, ordering up a domain name lease agreement calls for knowing what options are available. Often, this comes from experience.

Some of the basic variations and considerations are as follows:

1. What is the value of the domain name?

This is a key preliminary question for a number of reasons. First of all, the amount of effort you put into a lease agreement will often depend on the value of the domain name. A relatively cheap domain name will not usually call for a lengthy agreement full of complex protections for the domain name owner (the lessor) or the lessee.

Also, a lessee of an inexpensive domain name will often be scared off by a 10 page legal document. Accordingly, the starting point for determining what kind of domain name lease agreement you need, is determining the value and importance of the domain name to both the domain name owner and the lessee.

2. Will this be a "rental" or a "lease to own" arrangement?

Just like there are different kinds of car leases, such as a "walk away lease", a "balloon payment lease", and a "lease to own" or "finance" arrangement, so to are there different basic forms of a domain name lease agreement.

The most common kind of domain name lease agreement is where the lessee pays monthly "rent" for the use of a domain name over a period of time, and at the end of this term, either will own the domain name or have a right to "buy it out" with a final payment. The reason that this type of "lease to own" arrangement is the most common, is that leasing a domain name generally allows a lessee to obtain the use of a domain name that it would otherwise be unable to afford.

3. Will the domain name be held by the domain name owner, or be held in escrow by a third party?

When a lessee is considering making substantial monthly lease payments for the use and potentially the ownership of a domain name, the lessee will often want some security that the domain name will not be rented, sold, or even lost, to someone else, while he or she is making the lease payments to the domain name owner.

The lessee may therefore request that once the lease agreement is signed, and the first payment is made, that the domain name be transferred to an escrow agent for the duration of the payment term, so that once all payments are complete, the domain name may be transferred to the lessee, who by then has become the owner of the domain name. Alternatively, the lessee might be concerned that through negligence or malfeasance, the domain name owner might terminate the lessee's use of the domain name while it is being paid for by the lessee, and the lessee therefore wants the security of knowing that it is in the hands of a neutral third party.

From the domain name owner's perspective, it is always preferable of course to maintain the ownership and control of the domain name while a lease agreement is pending. Accordingly, this important aspect is often a key part of the domain name lease negotiation, and will often depend on the value and the importance of the domain name to both parties.

4. Are there any restrictions on the lessee's use of the domain name?

Once you sell a domain name, you won't really care what the new owner does with it. But just like when you are renting an apartment to someone, you will care what they use it for while they are renting it from you. For example, you won't want the tenant to damage the property, try to sell it from under you, have the police called to late night parties or for illegal activities, or use it as a store when it is supposed to be a residential unit.

The same kind of considerations apply when leasing out a domain name. If you are the domain name owner, you will want to have provisions included in your domain name lease agreement that restrict the kinds of things that the lessee is permitted to use the domain name for. Examples of these kind of restrictions might include not using the domain name for any kind of unlawful purpose, such as spamming or child pornography. Furthermore, a domain name owner may sometimes insist that the lessee disclose exactly what kind of good or service will be provided in association with the domain name, and have the lessee agree to not stray from that agreed use at all.

5. Are there any potential trademark issues?

When negotiating and entering into a domain name lease agreement, is is important to determine whether the domain name is being leased "free of any potential trademark issues", or whether it is up to the lessee to satisfy himself that the domain name can be lawfully used without attracting allegations of infringement which can greatly affect the domain name owner as well as the lessee.

Generally, a domain name owner will make it so that it is up to the lessee to be responsible for ensuring that his use of the domain name during the lease term, will not infringe any third party's trademark rights. Nevertheless, the domain name owner will want to keep an eye on this as well, since as long as the domain name is owned by the domain name owner, the domain name owner will need to ensure for itself, that its valuable property is not being risked through trademark infringing activity. Furthermore, if any claim arises, the domain name owner, and the lessee for that matter, will both have an important interest in being notified so as to deal with any such claim. Accordingly, notice provisions and indemnification provisions are key components of any domain name lease agreement.

6. What happens if there is a breach?

When negotiating a domain name lease agreement, it is crucial to include provisions that deal with unintended situations, such as when the lessee stops paying the rent, or if the lessee misuses the domain name. Normally there will be a "curative period", where the breaching party is able to cure its default, but sometimes the breach may be so serious, such as when a domain name is being used for illegal activities which threaten the domain name owner's ownership of the domain name, that there will not be an opportunity to provide a curative period before the domain name owner has to change the DNS settings so as to "lock out" the lessee.

Nevertheless, often it is possible to negotiate and arrange a way for the lessee to buy out the domain name in such circumstances, even when there is a serious breach, since the lessee may want to just take over the domain name, and the domain name owner will be just as happy to sell it for an agreed price at that point.

7. Where do disputes get resolved?

When there is a dispute over a term or condition of a domain name lease agreement, a good domain name lease agreement will include a "governing law" and "jurisdiction" clause. This kind of provision will ensure that it is clear that the parties have agreed to have any dispute decided by either a judge or an arbitrator, but will also often specify where the dispute is supposed to be resolved, e.g. where either the domain name owner or the lessee is located, and also deal with what language and what state or country's law will apply.

The degree of attention and concern that gets paid to this particular aspect will generally depend on the value of the domain name and the importance of the domain name to the parties. If it is a very valuable domain name, then it will be very important for both the domain name owner and the lessee to have the dispute decided close to home. But since that is often impossible since the parties are located far apart, then a middle ground can often be negotiated. On the other hand, sometimes a domain name owner will choose to accommodate the lessee's choice for jurisdiction, particularly if the domain name is being held throughout the term of the lease by the domain name owner, and not in escrow.

Conclusions

As you can see, there is no "one size fits all" domain name lease agreement, just like there is no "simple coffee" at Starbucks. An experienced domain name lawyer will be able to guide you through the considerations and options for a domain name lease agreement. Also, after negotiating and completing a few domain name lease agreements, you will have some experience in knowing which variables and options should be considered for your particular situation.

And by the way, I usually order a doppio, long, espresso, machiatto, non-fat, dry, one Splenda.







10 comments:

Nick Adams said...

Nice Post ? Keep it up..

eBruce said...

Great article Zak.

Anonymous said...

These all sounds great, but it's hard for beginners to find info required and lawyers really cannot help in most cases (many are not even aware what is a domain name)

Can't you also provide some links to a variety of sample/draft contracts/agreements for this purpose and a list of suggested or existing (if you want to be neutral) escrow/broker service providers ?


This would be of great importance for newbies that have just put their feet on domaining with a small startup portfolio, but can be the key to help them get success!



Thanks!

Zak Muscovitch said...

Many thanks for your comment, Anonymous. I really appreciate the time you took to ask these questions.

I do not however recommend using a store bought template without consulting with a domain name attorney, as otherwise you may be including the wrong or incomplete terms.

For escrow services, Ecop.com and Escrow.com seem to be well known services.

Rinske Geerlings said...

Hi there, thanks for the information about domain name leasing. Are there any online companies who facilitate the process of leasing as a broker, i.e. who take a fee if they find a domain name 'tenant' for any individual who has registered a domain name that has leasing potential? Many thanks.

Rinske Geerlings said...

Hi there, thanks for the information about domain name leasing. Are there any online companies who facilitate the process of leasing as a broker, i.e. who take a fee if they find a domain name 'tenant' for any individual who has registered a domain name that has leasing potential? Many thanks.

Zak Muscovitch said...

@Anonymous, I actually do not recommend using template agreements without legal advice since it is usually too difficult for a layman to revise them as required to fit the circumstances.

Zak Muscovitch said...

@Rinske,

Many thanks for your question Rinske. A domain name broker would likley be interested if the rental value of the domain name was high enough so that his or her commission would be worthwhile earning. Such domain names are few and far between of course. For more modest domain names, I am unaware of any rental platform at the moment, however you may want to look into it more here: http://leasingdomains.com/

Rinske Geerlings said...

Zak, thank you for your response. I will certainly come to you if I do need a solicitor in relation to domain leasing. Cheers, Rinske

Zak Muscovitch said...

@Rinske, Many thanks :)

I found a possible platform to check out for leasing domain names: http://www.cax.com/