Temporary tenancy agreements, better known as “pop-ups,” have become quite common over the past decade. These “pop-ups,” or short-term retail leases or licenses, have morphed from one-week sample sales to short-term tenancies, often for a period of up to one year. Many of these agreements have all the features of a long-term lease, such as cancellation rights, buyout provisions, and extension provisions. As online sales have eclipsed in-store retail sales, brick-and-mortar stores have struggled. This transition to “e-tail” has left many storefronts vacant. Property owners view pop-ups as an excellent opportunity to optimize the value of those empty retail spaces. Likewise, pop-ups are an elegant solution for successful online retailers considering a brick-and-mortar store or hoping to increase their brand profile. Pop-ups are a valuable way for a retailer to assess the demand for their products and concepts, with minimal risk. Often the landlord and tenant do not want to commit to a long-term lease as a new or online retailer is an unknown commodity, with no track record or history of brick-and-mortar retail sales. Pop-ups have proven to be a win-win proposition despite, or because of, their flexibility. The growth of pop-ups has spawned an entire industry of intermediaries matching property owners and prospective short-term tenants. Because of the short terms and often shared floor space, pop-ups are often licenses rather than short-term leases.
Pop-ups offer many advantages to property owners or landlords. Landlords can generate revenue from short-term licenses or leases while they wait for a desirable long-term tenant, the market rent to rise, or a zoning change ruling. Landlords can now reach small businesses seeking to use space for the short term. This new pool of prospective pop-up tenants available to landlords often consists of small businesses previously priced out of retail leasing. Landlords offer these pop-ups below-market rent in exchange for having the right to terminate or buy out the license and quickly evict if a desirable long-term tenant comes along. Another advantage is that these pop-ups, usually via a license agreement versus a lease, are more straightforward to negotiate and therefore involve lower transaction costs.
The rash of empty storefronts was a blight throughout the pandemic and caused decreased foot traffic for those businesses that survived. Retail spaces look better when occupied. Pop-ups for mixed-use commercial and residential properties are revenue-generating and enhance home values. Sometimes commercial properties have adjacent areas where a long-term tenancy would not be viable. A series of pop-ups in that space would allow landlords to capture that lost revenue. As stated above, retail spaces look better when occupied.
Pop-ups with unique experiential ideas in this competitive diminished retail environment are valuable. These buzzed-about concepts may be impractical for a long-term commercial lease but ideal for a pop-up. Landlords of pop-ups must, however, be careful to avoid being seduced by a trendy, high-profile tenant. Property owners or landlords should narrowly define the purposes for which the tenant or licensee may use the premises. A short-term tenant or licensee has no long-term investment in the property’s reputation. The landlord must ensure that the pop-up tenant does not install inappropriate signage, unsightly fixtures, or worse. For this reason, landlords should include strong indemnification provisions (and personal guaranties) to protect against liabilities resulting from the failure of the tenant to comply with the landlord’s or a municipality’s requirements. If a large store or chain operates this pop-up, the landlord may get a guaranty from the parent corporation. By contrast, the landlord may waive a guaranty if a large, established retailer is a desirable tenant.
Landlords should always have unfettered access to the space, provided the landlord does not unduly interfere with the licensee’s business. A license agreement should not include a covenant of quiet enjoyment. Pop-ups are short-term agreements, and the landlord still bears the risk of the long-term overhead on the space and must maximize the building’s rental stream. The landlord must maintain a flexible portfolio of tenants. Landlords can do this by negotiating clauses giving them the right to relocate or buy out pop-up tenants. The landlord should consider where pop-ups are located within a shopping center to ensure they enhance the aesthetics of the shopping center or its long-term tenants. Landlords should also review the exclusivity provisions in their existing leases to prevent a breach of those restrictions.
Most importantly, a short-term rental license agreement must provide that the rights granted to the licensee do not run with the land or constitute a possessory interest in the real property. The license agreement should contain language such as the following: “The Agreement granted as a result of this is a non-exclusive license for the licensee to use the licensed Premises solely as required to perform its obligations hereunder, revocable according to the terms hereof.”
Landlords should calculate common area maintenance (CAM) charges or additional rent for space for pop-ups and then build these costs into the base rent—passing through taxes and CAM charges as additional rent to a pop-up tenant is not practical. Just as impractical as it is for the landlord to apportion these costs over a brief period, it is not desirable for the pop-up tenant. A standard pop-up operates on a razor-thin profit margin and must anticipate its rent costs at the outset of its term.
Because the landlord is building its expenses into the base rent, it should include caps on utilities in the space. The agreement should address whether the tenant will have specific requirements, such as using excessive electricity or water.
An alternative rent model common in pop-ups is base rent plus a percentage of revenue. Many pop-ups derive revenue from online sales, which take more work to track. If the pop-up is primarily a showroom, the landlord could also request a portion of online sales while the pop-up operates instead of gross in-store sales. This rental arrangement also benefits the pop-up because the landlord shares the risk in their venture. Online tenants must negotiate use clauses for online retailer pop-ups: including an area for returns, shipping of omnichannel goods, alterations of clothing, and a delivery hub.
A license agreement must have an arbitration clause. As the license does not convey a possessory interest, the landlord and tenant could not litigate a dispute in a landlord-tenant court. It would be purely a contract action heard by a trial court or arbitrator. Given the short duration of pop-ups, arbitration is the fastest and most cost-efficient method.
Most short-term leases or licenses will require that the tenant obtain and keep in full force and effect general commercial liability, property and worker’s compensation insurance with a licensed carrier. The coverage limits should be higher than in a long-term lease due to the untested, transitory nature of the pop-up.
As well as “testing the waters” of a store presence, pop-ups can open near noteworthy events such as art fairs or seasonal attractions. Pop-ups can experiment with a novel, memorable, or offbeat venue to attract the increasingly jaded consumer. When doing this, however, pop-ups must consider the space’s zoning for retail use. When a pop-up tenant leases vacant premises, the space may lose any grandfathered zoning status. Online tenants must include accessory use of the space in their use clauses for online retailer pop-ups: These often include an area for returns, shipping of omnichannel goods, alterations of clothing, and a delivery hub.
Spaces designed for pop-up tenants or licensees are usually constructed as a “vanilla box” to facilitate the process of a quick turnover of the occupant. The tenant or licensee will have to take the space “as-is” in “broom clean” condition. The tenant or licensee generally makes no significant alterations to the premises. The landlord must make representations regarding building code compliance and the certificate of occupancy. A potential problem occurs when a pop-up tenant uses repurposed space previously zoned for office or manufacturing use and creates a pop-up store that makes the premises a “place of public accommodation.” This new classification could put a pop-up tenant on the hook for Americans with Disabilities Act (ADA) violations caused by their build-out, regardless of the short term.
The prospective tenant should obtain a copy of the landlord’s master lease if not renting directly from the property owner. When the rental agreement is a sublease from an existing tenant, the pop-up tenant must review the landlord’s sublease provisions to ensure compliance. The rental agreement should address whether the tenant’s plans will require consent from the landlord after the agreement’s execution.
If the chosen location has a history of complaints from neighbors, the tenant may be inheriting a problem. A pop-up tenant could face unanticipated hurdles—for example, even issues as mundane as municipal parking. If local stakeholders raise objections, the new tenant must make the case to local authorities that the pop-up will not attract significant traffic.
A pop-up tenant with enough bargaining power may request an exclusive clause, preventing its landlord from renting to a competing business in the shopping center. If a pop-up is successful, the tenant may seek an option to extend the term—for example, in the case of a shared space such as a food hall—and, especially in the marketplace or food hall concepts, a move to a larger or more prominent location.
Landlords may insert a provision that requires the tenant to maintain and repair the premises. This language could require the tenant to repair lighting, heating, plumbing fixtures, or an HVAC system. If the pop-up tenant makes no significant alterations to the premises, the tenant should object to this language. Pop-ups frequently have inadequate resources to manage these issues if something breaks down during their tenancy. If there is a need for a repair, usually only the landlord’s super or maintenance staff can take care of it. A pop-up licensee is a lower priority for the landlord than the landlord’s long-term tenants. The pop-up tenant should negotiate that the landlord agrees to “maintain, repair, and replace” building systems on an expedited basis.
Many short-term tenancies are better suited to be license agreements. License agreements have become standard for a broader range of uses, including (a) fashion pop-up or brand-building experience; (b) master lease of space with multiple units, often underutilized commercial or retail spaces; (c) food court; (d) billboard or telecom use; and (e) joint ventures or synergistic businesses, where physical proximity to others is deemed beneficial to promoting their respective business objectives.
There are three popular ways to organize a pop-up: The first involves leasing a space whose last tenant had a similar use; the second calls for renting out a portion of a current tenant’s premises footprint; and the third is taking over a nonzoned use, such as a warehouse. As heretofore discussed, the third option is the least attractive to pop-ups looking for a weeks- or months-long tenancy as getting municipal approvals will take significant time.
As licenses become more common, attorneys drafting short-term rental agreements must consider whether a court will interpret the document as a lease or license. For example, courts in New York look beyond the title of a document to define it. An agreement labeled a lease will be treated as a license if it has more of the elements of a license, and vice-versa.
The Supreme Court of Putnam County, New York, ruled in Zaslansky v. Zakkaya L.L.C., 41 N.Y.S.3d 722 (2016), that a tenancy agreement was a license, not a lease. The plaintiff was being evicted and sought an injunction available only to lessees. The court, however, carefully weighed factors such as whether the contract revocation was contingent on a default, access limitations, relocation rights, and control issues and found that the agreement was a license, not a lease. The court denied the injunction despite explicit language labeling the document a lease.
The Supreme Court of New York, Appellate Term, Second Department, in JCF Assoc., LLC v. Sign Up USA, Inc., 101 N.Y.S.3d 700 (2018), indicated that it was disregarding labels and terminology in the agreement. This case involved a billboard. It is standard practice to refer to billboard agreements as “leases,” the parties as “Lessor” and “Lessee,” and money paid as “rent.” The landlord had filed a holdover proceeding to evict. As the agreement was revocable by the landlord, the court (and the appellate court) found that the agreement was a license, not a lease, and the parties had not established a landlord-tenant relationship.
Courts frequently look at the equities of a situation when making decisions. In Blenheim LLC v. Il Posto LLC, 827 N.Y.S.2d 620 (Civ. Ct. 2006), the Civil Court of the City of New York County considered a lease provision making a restaurant’s license to use vault space revocable at will. The court concluded that the landlord knew the tenant needed the vault for its compressors, water heaters, and elevator machine equipment. The vault space was necessary for the tenant to use the premises as a restaurant and, therefore, irrevocable. Accordingly, where the lease is dependent on a license, a court might equitably rule that the ancillary license has the same protections as the lease.
Pop-ups must adhere to the same employment laws as long-term licensees or lessees. A pop-up’s temporary status may relieve it from some labor obligations, such as the Family and Medical Leave Act, as there will be no long-term employees. The pop-up will remain subject to other employment mandates, such as minimum wage laws and workers’ compensation. It is essential for the pop-up to have a system and policy to record workers’ hours. It is easy to lose track of your employee’s overtime hours and easy to run afoul of the wage-and-hour laws.
Although pop-ups frequently operate on a shoestring budget, creating corporate entities is essential. Pop-up tenants should set up a limited liability company or corporation with a business license to protect them, because the same liabilities exist as would in a long-term lease.
Tenants should apply for municipal permits and approvals required for their intended use as soon as possible. Depending on the nature of a tenant’s use, it may be necessary to coordinate inspections by the local fire department, local health department, or state liquor authority. Suppose the pop-up has outdoor space or encroaches on public land. In that case, the tenant may need community board approval. If there is a critical pop-up event, such as a concert outside, the tenant should have insurance for special events and weather coverage.
Setting up a pop-up can be just as expensive and time-consuming as a permanent store, with insurance, equipment, payroll, and advertising costs. Delays could jeopardize the profitability of the entire venture. There are now companies that can be retained by pop-up tenants to secure the space and provide other services to quickly get the pop-up tenant up and running. These services include design of the space with fixtures or furniture provided, setting up the internet, having signage designed and installed, and hiring and training staff. Some of these companies sign license agreements with the landlord and then further license the space to the pop-up client.
Overall, retail use clauses are becoming increasingly broad to accommodate “customer experiences” in line with the vision or branding of the tenant. Pop-up tenants would be wise to vet their ideas with an intellectual property lawyer in the zeal to attract attention. For example, a pop-up that featured McDowell’s, the McDonald’s-like restaurant in Eddie Murphy’s Coming to America, was sued by Paramount Pictures for copyright infringement. The pop-up’s operators argue that it is a fan-made parody. They may succeed, but most pop-ups do not have such litigation costs in their budget.
The pop-up’s appeal to landlords is the agreement’s buyout and recapture features. Pop-up tenants should be aware that licenses are, by definition, easily revocable by landlords. Suppose a pop-up tenant in a shopping mall spends a significant amount on an experiential concept and is later relocated or evicted. In that case, the agreement should provide that the landlord reimburse the tenant for an unamortized portion of the build-out cost. A shorter term and less costly build-out would lower buyout costs for the landlord.
In pop-ups, both landlord and tenant usually want flexibility. If a tenant wants to surrender the premises before the end of the term, the landlord may be amenable to it. The landlord may quickly recapture and remarket space. But suppose a pop-up tenant fails to surrender the premises on the termination date. In that case, the tenant should hold the landlord harmless from all damages resulting from their failure to surrender the premises, including, without limitation, claims made by a succeeding tenant. Landlords frequently include high holdover punitive penalties in pop-up agreements because the benefit of the bargain for landlords is the short-term aspect of the tenancy.
Landlord-tenant courts give substantial protections to tenants, even commercial tenants. An eviction of a tenant holding a lease can be an expensive, technical gauntlet of the legal process. Terminating a pop-up license entitles the property owner to engage in self-help—i.e., turning off utilities. Courts recognize the need for property owners to have this drastic remedy. The pop-up tenant should also have the right to self-help to cure any landlord defaults at the landlord’s expense.
In food halls or shared retail spaces, a problematic licensee can be disruptive. Landlords should attach a copy of the underlying lease as an exhibit to the license agreement to avoid plausible deniability of specific terms, restrictions, and obligations.
Licenses are per se revocable. If the landlord is itself a licensee, the parties must negotiate specific language as to whether a Master-License Agreement (MLA) or Sub-License Agreement (SLA) controls. An example of such language in the MLA is:
Although this agreement and each Sub-License Agreement (SLA) executed pursuant hereto is a license and that a license is normally revocable at will by the Licensor, the parties hereto agree that the License granted by this agreement and each applicable SLA is not revocable at will and that this agreement, and any applicable SLA, can be terminated only per the provisions of this agreement or as a result of a default existing beyond any applicable notice and cure period outlined in this agreement or otherwise as ordered by a court of competent jurisdiction.
Upon expiration of the term, the tenant shall surrender to the landlord the licensed premises in good condition (except for ordinary wear and tear) and will have the right to remove all the tenant’s equipment and trade fixtures installed in the licensed premises. The licensee shall perform all necessary repairs caused by removing these items.
The evolution of pop-ups has permanently disrupted the retail rental market. These short-term rental agreements are here to stay. Regardless, attorneys should not be lulled into a false sense of security by the short terms and lower build-out costs. Pop-up agreements should receive all the same considerations as a long-term lease.
