Recent years have seen the increase in popularity of pop-up shops as solutions for landlords in need of cash flow. Retailers like pop-ups as a chance to test the waters before signing a long-term lease or to sell seasonal merchandise. Pop-up shops began to take hold during the 2008 recession, when retail vacancies were high and landlords became more open to alternative leasing structures. For the small business owner, pop-up shops provide an opportunity to see how their goods fare and how much foot traffic there is around their store. For established larger retailers, pop-up shops provide a unique or seasonal marketing boost as demonstrated by Patagonia, Kate Spade and Toys R Us, among many others. For the landlord, a pop-up shop can serve as a quick fix until a longer-term tenant can be secured.
The short-term nature of pop-up shops does not necessarily mean that they are low risk with respect to legal issues from the landlord or tenant perspective. Below are some of the items that landlords and tenants should consider when negotiating a pop-up arrangement:
Lease or License:
Landlords and tenants must consider which type of agreement is best for the space. Whether the parties agree to a license or a lease is largely dependent on the length of the proposed tenancy and the prospect that the arrangement may become long-term. Landlords and tenants should be aware of the fundamental difference between a lease and a license. A lease conveys exclusive possession of a space in exchange for rent from the tenant. A license makes permissible a tenant’s (licensee’s) acts in the space that would not otherwise be permitted was the license not granted. Furthermore, licenses are typically revocable by the landlord (licensor) allowing a landlord to use self-help to remove a defaulting tenant. Landlords should, however, be aware of the fact that even if a license is used instead of a lease and the tenant fails to timely vacate the space, the tenant may allege a landlord-tenant relationship and a right to possession which may result in litigation.
Given the short term nature of pop-up arrangements, Landlords will want to make sure the space is preserved in good condition by the tenant. The amount and type of changes that can be made to the space should be limited so that the space remains as vanilla as possible and attractive to both potential long term tenants and other pop-up tenants without the landlord having to spend significant amounts of money. In contrast, a retail tenant may want the right to make necessary alterations to make the space suitable for their short term needs, and may want to minimize the need for landlord approvals because of the limited time frame of occupancy.
Landlords should make sure that adequate insurance is in place, exactly like it would be in a long term lease. This usually includes public liability, product liability, employer liability, and accidental damage liability, but depending on the space and situation, different types of insurance may be required. Retailers in particular may want to consider business interruption and loss of profits insurance.
Landlords must insure that they are adequately protected and compensated should a tenant fail to vacate the space upon expiration of the agreement. Even if a license agreement includes standard provisions such as:
- (i) the right of the landlord/licensor to revoke the license “at will”,
- (ii) landlord’s obligation to supply all the services to the space for the tenant to carry on its business and
- (iii) landlord’s complete control over the space,
given that that the agreement gives exclusive use to the tenant/licensee for a defined period of time and for a defined space, a court may find that the pop-up arrangement is in fact a lease. This gives rise to a landlord-tenant relationship and therefore removing a tenant may not be all that simple. At the same time, tenants, especially small business retailers, will want to negotiate minimal penalties for failure to timely vacate whether using a license or lease structure.
Utilities and Maintenance:
As in a long term lease arrangement, the documentation must address which party is responsible for providing and paying for utilities and maintenance of the premises. From the tenant’s perspective, the tenant will want the landlord to deliver the space with HVAC and all systems properly functioning from day one. The tenant will also want the landlord to be responsible for all costs and expenses of continual maintenance of these systems. In contrast, the Landlord may want to minimize the amount that landlord is investing in the space given that the tenant is short term. The landlord may insist on delivering the space “as is” and refuse to take on significant on-going maintenance responsibilities.
The list above should serve as a starting point for issues to consider in the context of a pop-up arrangement and is by no means exhaustive. Although pop-up arrangements are short term, the risks may be just as substantial as those found in a long term leasing arrangement.