A Three-Phase Strategy for Leasing to Pop-Up Tenants

Nontraditional, short-term stores have been popping up in malls, shopping centers, department stores, and other retail settings for over a decade. While generally less desirable than long-term tenants, pop-ups offer landlords the opportunity to pocket extra cash on vacant or non-rent-generating space. Because they usually have a smaller set-up, pop-up tenants can also pay more per square foot than conventional tenants, especially if they’re associated with national companies and name brands.

Historically, landlords have used pop-ups to spice up their centers, especially during the Halloween and Christmas seasons. But pop-up leasing may now be growing into something more than just a footnote or sideshow. That’s because pop-up retail has actually benefited from the COVID-19 pandemic. As commercial vacancies rise, landlords have been increasingly willing to lease to retailers seeking to try out new product offerings on a short-term basis.

Pop-up leasing is growing not just in volume but scope, with retailers expanding beyond their fashion and novelty roots into other sectors carrying year-round and not just seasonal appeal, most notably food services. Pop-ups are also appearing not just in shopping centers and department stores, but also parking lots and other outdoor areas adjacent to non-retail locations (for simplicity’s sake, we’ll use the term “shopping center” or “center” to refer to these properties collectively). Consequently, many landlords are venturing into pop-up leasing for the first time.  

Whether you’re an experienced veteran or just dipping your toe into the water, it’s crucial to adjust your conventional leasing practices and agreements to deal with the unique challenges posed by leasing to pop-ups. This article lays out a three-phase strategy for doing that.

Phase 1: Due Diligence

As with any other retail tenant, leasing to a pop-up raises questions of synergy and competition with existing tenants. Will the lease violate a cotenancy or exclusive clause? Will the pop-up shop’s logo violate the signage provisions of any other tenants? These are among the questions you must consider to guard against the risk of your short-term pop-up arrangement alienating any of your core tenants.

Have the pop-up tenant provide a list of the items that it plans to sell and a copy of its logo and other signage. Ensure that the items meet your approval and don’t conflict with any other core tenant agreements.

If you decide that a pop-up tenant is suitable, you’ll have to obtain the necessary approvals from not just the other tenants but also mortgagees, associations, insurance carriers, and condominium associations. At the same time, the prospective tenant will need to undergo fire department inspection and secure occupancy, health, and other permits necessary to conduct their business.

Phase 2: Deciding Between Lease and License

Once you vet a pop-up tenant, determine which business model to use to provide it space. There are two basic choices: lease or license. Real Property Law, 101: A lease conveys a right of exclusive possession for a specific period of time in return for rent payment; a license, by contrast, conveys a temporary, non-exclusive, revocable privilege to enter the property to perform a specific act.

While every deal is different, general principles apply in all cases. The biggest advantage of a license is that you can revoke it without notice since a licensee doesn’t have an interest in the land the way a tenant does. The resulting ability to remove a licensee quickly, easily, and at relatively low cost can be a huge protection when dealing with unproven businesses on a short-term basis.

The downside of licenses is that they don’t offer the security or stability of a lease. Accordingly, leasing the space might be a more appealing option when a pop up brings to the table an established business track record, large inventory, and/or willingness to invest significant resources to set up storefront displays, install temporary fixtures, or otherwise improve or configure the space.

Caveat: Court may reclassify your license as a lease. It’s the substance of the arrangement rather than what you call it that determines whether it’s a lease or a license. Thus, even if your agreement is titled as a “license,” a court may rule that it’s actually a lease if you treat the pop up like a tenant. Result: You won’t be able to revoke the agreement without notice.

You can reduce this risk by including language in the license agreement indicating the licensee’s acknowledgement that the arrangement isn’t a lease and agree not to sue you or argue otherwise in court. As backup protection, have the licensee agree that you’re entitled to exercise the rights of a landlord if a court actually rules that the agreement is a lease.

Model Language

Licensee specifically covenants and agrees for Licensor’s benefit, and as a material condition to this agreement, that: (1) neither this Agreement nor any other of Licensee’s rights in connection herewith shall constitute a lease, whether of the Kiosk Area or otherwise; (2) Licensee shall not bring any action against Licensor or interpose any defense against Licensor based upon the theory that this Agreement constitutes a lease; (3) Licensee expressly waives any substantive or procedural rights that Licensee may have that are predicated upon this agreement being treated as a lease; and (4) should this Agreement be deemed by any court to constitute a lease, Licensor shall have all of the rights and remedies of a landlord of real property.

Phase 3: Drafting the Right Lease

The final and most important part of the leasing strategy is to create a proper agreement. Regardless of whether you follow the lease or license model, don’t simply cut and paste your standard lease form into the agreement. While those traditional terms still need to be addressed, you may need to modify them to make them work for a licensing or short-term leasing situation (to avoid having to continually say “lease or license” and “licensee or tenant, we’ll use the terms “lease” and “tenant” collectively).

THE 12 KEY LEASE ISSUES TO CONSIDER

There are 12 terms to consider when leasing to a pop-up.

1. Lease Term

Pop-up leases are short in duration, generally running between one and six months. Best practice dictates getting a minimum one-month commitment from the tenant.

2. Leased Premises

The space that you lease to core tenants may be unsuitable for pop-up tenants that are mobile. Such tenants tend to want to be nomadic and continually relocate to flow with foot traffic patterns, retail leasing veterans note. To maintain control over location, specify in the lease where in the center the tenant will be located. Consider attaching a copy of the floor plan highlighting the designated area to the lease.

Model Language

For purposes of this License Agreement, the “Kiosk Area” shall mean that portion of the Center containing [insert #] square feet, as more fully depicted in Exhibit [insert #] attached hereto.

3. Approvals & Permits

If, as is often the case with short-term leases, there’s not enough time to obtain the necessary approvals and permits we discussed earlier, one or both parties may have to be willing to accept risks of going forward without them. Include appropriate representations or indemnification provisions to protect against liabilities resulting from the tenant’s failure to comply with applicable requirements.

4. Construction & Restoration of Space

Many pop-ups are designed not just to sell merchandise and food but offer customers a brand experience. For example, Kate Spade pop-up stores are built in the shape of a jewelry box; Adidas pop-ups are shaped like a shoebox. Other pop-ups incorporate elaborate interactive technologies requiring special displays and fixtures. Accordingly, pop-up tenants may need broad alteration and buildout rights to reconfigure the space.

The good news is that pop-up tenants are generally prepared to pay for the necessary construction. The bad news is that allocating financial responsibility to the tenant may not be enough to protect you if the construction clashes with the look of your center or requires signage or installations that are difficult to remove after the lease ends. So, ensure the lease requires the tenant to get your approval of construction plans and specifications. Also give the onsite property manager a degree of control and day-to-day supervision over the work to minimize disruptions.

Model Language

Tenant, at its expense, at all times, shall keep the interior and exterior of the Space aesthetically pleasing and consistent with the architectural style of the Center. Tenant agrees to submit all plans for construction, the display of merchandise, and decoration in the Space to Landlord; and Landlord has the right to disapprove all or any part of such plans in its sole judgment if such plans would result, in whole or in part, in an appearance not aesthetically pleasing to Landlord or inconsistent with the aesthetic appearance of the Center. The decision of Landlord to disapprove of such plans shall be conclusive.

Make the tenant solely responsible for dismantling the shop and restoring the space to its original condition and configuration when the lease ends.

5. Rent

The conventional retail model in which the tenant pays a fixed amount for base rent and a percentage of its gross sales works best with tenants who are in the space for a long period. Alternatives to consider when leasing to a pop-up tenant include:

• A gross lease in which the tenant pays one flat-fee lump sum covering all elements of rent; or
• A fixed rate lease in which the tenant pays a fixed amount for each element of rent, such as $X per square foot in base rent, $X for CAM, $X for utilities, etc.

Strategic Pointer: There’s a risk that a pop-up tenant will fail and/or vacate early before you can collect the rent. Accordingly, many landlords request prepayment of at least a portion of the rent upon the tenant’s occupancy.

6. CAM Costs

Because pop-up tenants use the common areas, you can require them to pay common area maintenance (CAM) costs. However, the one-year lookback period for the landlord to reconcile CAM costs and determine each tenant’s share is ill-suited to pop-up tenants that occupy the space for less than a year. To avoid the prospect of having to reconcile costs after the fact and chase after a pop-up tenant long after it’s left the property, landlords often charge a grossed-up amount of potential costs—sometimes at one and a half to two times above what they expect those costs to be.

7. Permitted Uses

Pop-up tenants may ask for flexibility as to their stated use, so that they can adjust merchandise or carry out promotional events. However, this could create tension with existing tenants. Having verified that a pop-up arrangement is consistent with your tenant mix and obligations to core tenants, the last thing you want is for the tenant to stray beyond its inventory or menu. To protect core tenants against the risk of unfair competition, make sure the use clause is very specific and spells out the items the tenant can sell.

Model Language

Tenant shall use the Premises for the display and retail sale of [specify merchandise items] and for no other purpose.

8. Hours of Operation

A pop-up tenant won’t bring much to your center if its space is dark when your other tenants are open. So, require the pop-up tenant to be open and continuously operate during business hours. As you should for any retail tenant, get the right to extend hours during the holidays or other busy times, at your sole discretion and without having to get the approval of tenants or merchant’s associations.

Model Language

Tenant agrees to open and continuously operate its business in the Premises during all business hours of the Shopping Center and shall conduct its business in a high class and reputable manner and in accordance with the Shopping Center Rules and Regulations, as set forth in Exhibit [insert #] attached hereto. Landlord shall have the right, at its sole discretion, to extend such business hours without the prior approval of Tenant or any trade or merchant’s association to which it belongs.

9. Insurance & Liability

It’s essential to include insurance and liability protections in pop-up leases even though they last only for a short period. Require tenants to obtain and keep in full force and effect insurance policies with a licensed carrier that covers the premises and the tenant’s use, including:

• Commercial general liability coverage of at least $1 million per person and $2 million per accident (not counting the deductible);
• Property damage liability of no less than $1 million (again, beyond the deductible);
• Workers compensation insurance of at least the minimum amount required by state law for any construction work it does on the property;
• Personal property and alterations coverage in full replacement value for its property and alterations.

Strategic Pointer: Make the tenant provide you with valid certificates of insurance coverage upon executing the lease. Also have the tenant indemnify you for damages incurred as a result of its failure to perform its obligations under the lease; prepare to make the indemnification obligation mutual if the tenant demands it.

10. Security Deposit

When leasing to a pop-up tenant, you may be tempted to cut corners by waiving the security deposit requirement. That’s a terrible idea. Attorneys advise asking for at least two months’ rent in case the tenant defaults, especially when it’s not part of a financially stable national chain. Also require the pop-up tenant to restore the security deposit to its original amount if you must use the security deposit to cure a default.

Model Language

Tenant shall, as a condition precedent to its rights hereunder, deposit with Landlord, for Landlord’s general account, the sum of $[insert amount] as security for the performance of each and every term and condition of this Lease on Tenant’s part to be performed hereunder (“Security Deposit”). Landlord may use, apply on Tenant’s behalf, or retain (without liability for interest) during the duration of this Lease the whole or any part of the Security Deposit to the extent required for the payment of any Rent which may be unpaid, or for any sum which Landlord may expend to cure any default of Tenant, whereupon Tenant shall promptly restore the Security Deposit to its original amount. Tenant’s failure to restore the Security Deposit to its original amount shall constitute a default under this Lease. Provided that Tenant has complied with all the terms and conditions of this Lease, the Security Deposit (less any amount applied as provided above) shall be returned to Tenant, without interest, after the Expiration Date and after surrender of possession of the Premises to Landlord in accordance with the terms and conditions of this Lease.

11. Assignment & Sublease

Pop-up tenants may want the flexibility to assign or sublet their lease, especially when they’re affiliated with businesses that are national in scope. While this is generally agreeable for conventional leases, having to deal with sublets and assignments probably isn’t worth the hassle for a short-term agreement. If you agree, state that tenants may not sublease or assign all or any part of premises.

12. Defaults

Commercial leases typically give tenants a five- or 10-day window to cure nonpayments, and a 15- or 30-day window to cure default of nonmonetary obligations. But because the duration of a pop-up lease is so much shorter, landlords should provide for a shorter cure period, such as two days to cure a rent nonpayment.