While temporary “pop-up” stores are not a new concept, their prevalence has grown exponentially in recent years. Anyone who has ever purchased a Halloween costume or a Christmas tree has likely visited a pop-up store; however this type of retail is no longer limited to focusing on holiday decorations or special events. Today, one can find pop-ups selling everything from the newest electronics to the hottest fashion accessories.
Pop-up shops can be set up in a variety of locations, including neighborhood shopping centers, malls, airports, convention centers, concert venues and more. The pop-up concept is particularly attractive to entrepreneurs interested in testing their new business or products without the risk associated with signing a traditional lease. However, pop-ups are not just for small businesses. Savvy marketers for established retail giants and online merchants are increasingly utilizing pop-ups stores to explore new markets and gauge consumer interest in creative product lines.
The increasing popularity of pop-up stores has been a boon for landlords struggling to fill vacancies amid the explosion of online shopping and coinciding rise in brick-and-mortar store closures. And it is no longer a niche business. Storefront.com estimates that pop-up retail has grown into an $80 billion industry. Although landlords prefer long-term leases with established tenants, many owners recognize the value in experiential retail. Pop-ups create buzz and help drive shopper traffic. And successful pop-ups may become longer term tenants with larger footprints. While there are many benefits to pop-ups, landlords and tenants should consider several legal issues inherent to these arrangements.
Draft carefully: lease versus license agreements
Many pop-ups involve license agreements instead of leases. A license is the right to temporarily use a space, while the actual possession of the property remains with the licensor. Unlike a typical retail lease, which may require weeks of negotiation, license agreements are short and exclude most of the more controversial lease provisions, thus saving time and expense in negotiations. For example, operating expenses and other traditional pass-throughs are not practical for short-term arrangements lasting a few hours, days or weeks. The time it would take a pop-up to set up services like garbage removal may exceed its term of occupancy.
Pop-up tenants must acknowledge that landlords will not accept certain tenant-friendly provisions common in leases, such as assignment, sublease, alteration or holdover rights in a license agreement. Landlords should consider their limited remedies for defaults in license situations and should therefore ensure that they obtain sufficient security deposits, personal guarantees and indemnifications from the tenant which survive the termination of the agreement. Moreover, if the parties intend to enter into a license agreement instead of a lease, they should pay particular attention to the drafting of their agreement as courts often ignore titles and look closely at the language in determining whether a document titled a license is actually a lease and vice versa.
Since a license agreement may not include operating expense reconciliations, landlords have little room for error in determining their expenses. Landlords should allow themselves a comfortable cushion when factoring tax, insurance and other costs into the rental calculation. Conversely, tenants should carefully review a detailed breakdown of the common area charges to better understand the expenses, so they can negotiate competitive rent.
Use clauses and preliminary approvals
Since many pop-up operators are under time constraints and must open by a specific date or simultaneously with a special event, they should engage with governmental authorities as early as possible to obtain any permits and approvals that may be required due to their intended use. Depending on the nature of a tenant's use, it may be necessary to obtain a business license from the municipality or coordinate inspections by the local fire or health department.
Landlords should review their mortgage documents to confirm that leasing to a pop-up operation will not violate any loan covenants. Landlords should also review the exclusivity provisions in leases with their existing tenants to ensure they will not breach any restrictions by leasing to a pop-up.
The need for speed: delivery, repairs and maintenance
Due to pop-up retailers' need for a rapid opening, they may not have the time to conduct detailed investigations of a property's electrical, plumbing and mechanical systems. Thus, pop-up tenants may have to accept a property "as-is,” but should require that the landlord deliver the property clean and free of violations with all systems in good condition. Tenants may request that landlords affirm that their property complies with code and has a valid certificate of occupancy. Landlords should make such representations cautiously, since a pop-up's intended use may run afoul of local zoning regulations. For example, a pop-up store located in an area zoned for office use may transform the space into a public accommodation, thus triggering the need to comply with additional regulations such as the Americans with Disabilities Act. In any event, tenants should perform a basic level of due diligence on a space and the landlord. Tenants should look out for red flags, such as a property or landlord with a history of complaints from tenants and neighbors. Conversely, pop-up operators may not care about a property as much as a longer-term tenant and thus landlords should demand liberal access to the premises to monitor for damage and environmental hazards.
In addition, due to pop-up’s short vacancies, traditional repair and maintenance obligations imposed on tenants, such as the maintenance of interior walls and HVAC systems, are not realistic. Landlords must be prepared to quickly complete all repairs and maintenance. Since a delay in opening or completing a repair could be fatal to a pop-up business, tenants should consider demanding a termination right in the event the opening date is postponed, or repairs are not completed in a timely fashion. Similarly, tenants will want a right to terminate in the event of a casualty rather than wait for the landlord to rebuild. Accordingly, landlords should consider their ability to complete all repairs at the premises on an expedited basis prior to entering into agreements with pop ups.
Conclusion
Once considered a novelty, pop-up retail has become a staple of today's retail landscape. While short-term leases provide many attractive benefits, landlords and tenants should draft their agreements carefully to ensure a mutually advantageous arrangement and successful relationship.
Herman R. Lipkis is a real estate and hospitality attorney with Holland & Knight.