Feb 08, 2018

"Pop-up" shops should not result in "pop-up liabilities"

We’ve all seen them and you’ve likely shopped at many of them. Whether it is the seasonal Halloween or Christmas shop, an art gallery exhibition of a hot local artist, or even more famous, nationally branded companies using pop-up shops to build up the profile and exposure of new products, these temporary tenancies continue to reap benefits for landlords and tenants alike. A “pop-up” retail space is simply a retail tenancy involving a tenant which “pops up” and then is gone anywhere from one day to a few months later.

There are several benefits of such pop-up shops to both landlords and tenants. For the landlord, pop-up shops can provide a short-term answer to vacancies in a building. Under normal circumstances, a landlord would obviously prefer a long-term credit tenant; however, during the times of vacancy while pursuing such a tenant, an ongoing empty space can create a negative effect on the building. A short-term pop-up shop can add an element of freshness, vibrancy and, of course, foot-traffic to an otherwise stale space and, let’s not forget that discounted rent is better than no rent at all. For the tenant, a pop-up shop can be a cost-effective way to not only sell seasonal products in a brick-and-mortar space but also a method to test and market new goods and services without committing to a long-term lease.

Although such pop-up shops can be appealing to both landlords and tenants, the lease document memorializing such a tenancy should still be carefully contemplated by both sides. A landlord needs to obviously be mindful of the term of the lease and maintain the flexibility necessary to keep the space marketable to an attractive long-term tenant. In a shopping center setting, a landlord should also be careful not to inadvertently violate exclusive use rights with other tenants in the building. Also, legal provisions found in longer-term leases such as insurance, indemnities, restrictions on assignments and sublets, and repair and maintenance responsibilities of the tenant usually closely mirror that of longer-term tenant lease documents.

For the tenant, the rent for a pop-up shop may generally be as little as half that of a longer-term lease for the same space. They are usually structured as “gross” leases, although some level of common area maintenance and maintenance and repair responsibilities for the subject space are also typical. Although a tenant enjoys a lower rent and lower long-term risk on the space, there are still several lease provisions which should be closely scrutinized by the tenant’s counsel.

For example, a tenant should insist that the landlord deliver the premises, including all systems serving it, in good working order from day one and any interruptions due to landlord’s acts or omissions should result in an abatement of rent. Also, a tenant should review carefully its maintenance, repair and replacement obligations. For example, if the HVAC unit breaks down a week into the tenant’s occupancy of the pop-up shop, who has to replace it? It certainly shouldn’t be the tenant, absent misuse or negligence on their part.

The current retail market continues to breed more and more short-term, or “pop-up” leasing opportunities from the perspective of both the landlord and the tenant. Although these pop-up shops can be portable engaging solutions to the business objectives on both sides of the table, as with more complex, longer-term leases, proper legal advice is imperative to avoid any “pop-up” liabilities with your “pop-up” shop.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: K. Shaylan Baldwin, Principal

This alert originally appeared in the Winter 2018 Real Estate Focus newsletter.