Faced with the realities of e-commerce and changing consumer habits, many brands are hesitant to expand their bricks-and-mortar presence, leading to empty storefronts in some premier markets. Still, a physical presence provides a certain je ne sais quoi, especially for brands that only have existed in cyberspace.
Likewise, your customers get the instant gratification of browsing a great (but limited in time) retail space and making a purchase, item in hand. The ideal is to strike a balance between the digital and physical. Enter the pop-up store, a $50 billion segment in 2016, and a retail channel that is increasingly being embraced by popular brands and young companies alike.
For retailers concerned with the risk of long-term leases, the pop-up store offers the ability to test market a new line, discover a new neighborhood demographic, experiment with exclusive items, host events, and otherwise create Instagram-worthy buzz without a big investment. Sound easy? In truth, pop-up store agreements vary from traditional leases and bring their own sets of issues. Below are some points that retailers should consider when negotiating a pop-up shop location.
License vs. Lease: Given the short-term nature of the arrangement, the agreement will likely be a license rather than a lease. As such, the landlord (“the licensor”) grants permission to the retailer (“the licensee”) to enter and use the space as a pop-up store for a limited period of time, subject to payment of rent (“license fee”) and certain conditions contained in a written agreement (“license”). As a “license,” the licensor (landlord) generally has greater flexibility than under a real property lease and, therefore, the licensee (tenant) generally has less protection than with a traditional lease. This is the trade-off for use of the space short-term.
License Grant (aka “the Permitted Use”): As the licensee, make sure the “permitted use” in the license covers what you plan to do in the space. For example, to use the space “as a pop-up shop for the retail sale of clothing and accessories and for presentations and events incidental to such a business.” The retailer is typically not allowed to use the space for any unlicensed purpose without the landlord’s consent. The license should allow the brand to operate during normal retail hours and host fashion shows or events with a reasonable volume of music. Be as specific as possible to ensure that the license covers your intended use.
Condo/Co-op Board Issues: In a metropolitan setting, the retail space may be on the ground floor of a building that is a condominium or coop, and thus subject to certain “house rules” or bylaws that require a tenant to obtain the condo/co-op board’s prior approval before certain uses, such as erecting new signage, hosting events or conducting renovations. The licensee ideally should require the licensor to obtain all such approvals as a prerequisite to the licensee paying license fees (the rent). For example, “the licensor represents and warrants that the licensee will not require any approval from the condominium or co-op board or any other person to occupy the license area for the Permitted Use or, if such approval is required, that such approval has already been obtained.”
Signage: Be clear on the expectations regarding signage. Ideally, signage should be pre-approved by the licensor as part of the license. The licensee should ensure that its plans for signs, banners, LED displays, sidewalk designs or other adornments comport with the license and the condo/co-op documents (if applicable). Also, the licensee may need the licensor to cooperate and assist with any necessary approvals from the condo/co-op board and any city agencies (e.g., Landmarks Commission).
Occupancy: Does the license require the licensee to obtain all licenses, permits and approvals in order to use the licensed area, including a certificate of occupancy? If so, factor into your license decision what documents/approvals you need to obtain, the timing and cost of obtaining prior to occupancy. The process can be overwhelming and may lead retailers to explore alternative options.
HVAC and Electricity: In a standard retail lease, the licensee generally is responsible for maintaining the HVAC system. Given the short-term nature of the lease, however, it can become prohibitively expensive if the licensee is responsible for all repairs, maintenance and/or replacement of all or part of an HVAC system. If the licensor insists on such language, consider a cap on repair costs and a representation and warranty that the HVAC system is in good working order. How about electricity? How do you determine your allocation of electricity in the building — does the space have its own electric meters and/or sub-meters? Will you receive a copy of the sub-meter readings to verify that the charges are correct?
Maintaining the Space: Who has the obligation to make repairs of structural components or building systems or any other repairs? If you agree that such responsibility is the licensees’, then make sure you do a thorough inspection of the space, including electrical and HVAC systems, and try to limit repair obligations to non-structural portion of the space.
Representations/Covenants (Contractual Promises): A license agreement will contain representations and warranties that certain conditions are true, and language that obligates each party to do (or not to do) something or warrant that a certain condition is true. As the licensee, you should look for representations and warranties by the licensor such as: (i) the Permitted Use is allowed under the applicable laws and/or any certificate of occupancy; (ii) the landlord or condo board is not intending to erect scaffolding or a sidewalk shed in front of the building during the license term; and (iii) the building is in compliance with applicable laws before the license term begins (e.g., no open city violations regarding occupancy issues).
Casualty. Since the license is short-term, seek the right to terminate in the event of any fire or other casualty which renders the space unusable, or at least seek to abate the rent if the space becomes unusable during the license term.
Injury: If there is an injury or accident to someone in or about the licensed area resulting from the licensor’s negligence, who is responsible? Some licenses require the licensee to indemnify the licensor — even for the licensor’s negligent acts.
Prohibition on Assignments: Given that the arrangement is a license for a pop-up store and not a long-term lease, the licensee generally will not be allowed to assign or sublet any part of the space. Such a prohibited assignment may constitute a default under the agreement, compelling the licensee to surrender the premises to the landlord.
Termination and Default: The best option is a non-revocable license during the license term, except upon limited, concrete occurrences, which might include the licensee’s default on payment, a casualty event (e.g., fire, flood) or a prohibited sublet by the licensee.
Renewal Options: If you are interested in potential renewal, try to negotiate the renewal terms at the time you enter into the license, for example, an option for renewal at a certain fee for a certain additional length of time. Otherwise, if the location is a success, the licensee may find themselves at the licensor’s mercy at the end of the license.
Monica B. Richman is a partner in the New York office at Dentons. She serves as counsel to clients who include many of the world’s biggest names in the entertainment and fashion industries. Richman’s specialties include licensing, commercial contracts, and intellectual property development, protection and management.