Pop Goes Retail
Temporary stores need their own lease language.
lease is more than just a new name for a traditional short-term lease. The
power of new media, along with the effects of the Great Recession, has created
fertile conditions for a new breed of short-term retail lease.
short-term commercial leases are nothing new. Typically these leases run a year
or less, going month to month after that initial period, allowing either party
to end the agreement. Because of the short term, the parties usually negotiate
simplified leasing arrangements and avoid serious financial commitments such as
upfront expenses for new construction. They may even avoid any demising of the
space at all. For example, in office buildings, short-term tenants may share
open corridors, access, and reception areas; in industrial warehouses,
short-term tenants may separate their spaces with only a chain link fence or
rope, or even a mere paint stripe, and they may share dock doors.
leases adapt these concepts to the modern retail environment. A long-established
type of pop-up shop is a seasonal business,
such as a Halloween or Christmas store. But now all types of retailers seek
novel advantages from the pop-up arrangement.
retail marketing approaches have embraced the pop-up idea. A retailer with a
new concept may want to briefly occupy a prominent space solely for the
visibility and the buzz it creates, or to temporarily experiment in a test
market. Online retailers increasingly seek a physical store presence to
complement their websites. Established national retailers, no longer willing to
cede the short-term lease market to small businesses, are increasingly
exploring pop-up arrangements to exploit seasonal or other short-run market
real estate concept may even be evolving, where a particular space is operated
as a permanent pop-up site for a continually changing cast of new and
attention-getting tenants. The viral marketing nature of Facebook and other new
media fuels the success of these approaches.
facing daunting vacancies have been unusually open to offering even prime
retail locations to these short-term tenants. Normally, any landlord would
prefer a solid, long-term tenant, but landlords can also receive benefits from
of an improving leasing market in the future, a landlord can opt to fill up its
vacant space now with a cash-flowing tenant without getting stuck long-term
with currently low rental rates. Landlords can also exploit the attention a
pop-up retailer creates, bringing shoppers and market visibility to a fading
center. Pop-up retailers also provide dynamism and entertainment value to
landlords of mixed-use projects who are seeking amenities for their office or
with these quick, simplified deals, landlords need to carefully structure
pop-up leases to create sufficient flexibility so that the space remains
marketable to attractive long-term prospects. In addition, landlords need to
have enough standard legal protection to avoid liability and runaway costs.
tenant may want a very short lease term, anywhere from six weeks to six months;
some may desire month-to-month leases with the option to grow into a long-term
tenancy. But a landlord needs flexible termination rights of its own so it can
keep the space available for a solid long-term tenant. Also, because short-term
tenants, for whom time may be critical, will probably be extremely sensitive to
initial delivery deadlines, the lease agreement should clearly spell out these targets
and any exceptions or penalties, so that neither party is blindsided.
a pop-up store may be as little as half of that for a traditional lease, and is
typically arranged with a gross flat rate that includes common-area expenses
and sometimes utilities. However, to avoid swallowing unexpected costs for
pop-up utilities or special services such as security, landlords should
strategically assess specific site conditions and structure the deal
of structuring rent payments, a very brief term of one to six weeks may call
for prepayment or two lump-sum payments. Otherwise, it’s usually on a standard monthly (or prorated
monthly) basis. Rents are usually a fixed amount, not linked to sales
performance, as pop-ups are often more about visibility than sales. And the
term is too short to justify the expense and hassle of reviewing and auditing
the agreement should clearly limit the use rights of short-term tenants. With
regard to sales, granting an exclusive use right to a pop-up would tie the
for other prospective tenants; a loosely drafted permitted-use clause in the
pop-up lease agreement risks conflict with the exclusive-use rights of existing
tenants and risks upsetting existing tenants if the pop-up tenant engages in
undesirable conduct. Remember that many pop-up tenants may desire publicity but
likely feel little commitment to the quality operation and reputation of the
overall project. Landlords should carefully assess the likelihood of violating
existing leases, or even just injuring operations of (or relationships with)
valued long-term tenants in evaluating the quality, reputation, and likely
operating hours of a proposed pop-up tenant.
a pop-up lease shouldn’t
surprise a landlord with pop-up liability. Legal protections in the insurance,
indemnity, limited liability, and similar provisions should be just as solid as
those in any long-term lease. Liability from a slip-and-fall or any other
incident won’t be any
less for a short-term deal.
“Pop-up” may be a trendy label, but landlords using an
old-fashioned, careful approach to leasing will benefit from the new market
dynamics and the opportunities that these deals present.
Steven P. Heller is a partner with Gilchrist
& Rutter PC, based in Santa Monica, Calif. He focuses on commercial
leasing, development, and sales/acquisitions. Contact him at email@example.com.