There is no question that e-commerce has changed the consumer landscape. Consumers are turning more and more to online retail than to the traditional brick and mortar way of shopping. The impact is felt throughout the economy and certainly by landlords and tenants. An example is the recent surge in tenant insolvencies and vacancies within the commercial real estate market. Landlords are finding it more and more difficult to maintain steady rental income. However, all is not lost. A recent uptick in pop-up shops provides both tenants and landlords with relief. Pop-up shops are those shops that occupy retail space for short periods of time, ranging from day-to-day, weeks, months, to over a year. This blog discusses the advantageous of entering into a pop-shop rental agreement and some of the governing terms to consider.
Landlords have much to gain from renting their space to pop-up shops. For one, as mentioned above, the rise in vacancies allows landlords to generate rental income from what would otherwise be vacant space. The limited rental period associated with pop-up shops also allow landowners to vet tenants to determine the value of possibly entering into a long-term lease. Pop-up shops located within shopping centers are specifically advantageous to landlords because the increased foot traffic from customers returning to see the latest tenant and their products or services tends to provide the other tenants with more business.
Tenants, on the other hand, get to avoid the risks that come with long-term rental agreements while benefiting from the ability to gauge public reaction to their products and services. Tenants are also able to test the profitability of operating in various locations. More importantly, pop-up shops provide businesses with the opportunity to showcase their products, which in today’s online market, tends to increase the sales of those products online.
The first and most important consideration in entering into a real property agreement for a pop-up shop is to determine the type of relationship. Two options to consider is either a license or lease agreement. Understandably, deciding which of these two types of agreements works best will depend on (a) the nature of the pop-up business and (b) the length of time the tenant expects to occupy space. A license agreement is generally faster to negotiate than a lease agreement. It provides both the tenant and landlord with more flexibility in entering into and/or exiting the agreement. In contrast, a lease agreement requires greater protections on both sides as a lease provides tenants with an interest in real property and with rights to exclusive possession. Thus, in negotiating the terms of the lease, both sides will have to account for the greater number of laws affecting lease agreements.
It is important to consider the breadth of the “use clause” when entering into a pop-up shop rental agreement. The use clause restricts the products and services the tenant is able to sell. Tenants would generally want to broaden the use clause to adapt to changing consumer demands. Landlords, however, would prefer to restrict the tenant’s use, especially when the landlord has exclusive use agreements executed with other tenants.
Pop-up shops usually include a “percentage rent” term. That is, the rent the tenant owes depends on the percentage of the tenant’s gross sales. The obvious concern here for landlords is that rent is tied to the success of the tenant. Thus, a tenant that does not produce much in sales will pay only a small amount in rent. As protection, however, landlords should conduct the appropriate due diligence to determine the desirability of any particular tenant.
What is included as “gross sales” is also important. The more of the tenant’s sales is attributed to “gross sales,” then the more the tenant has to pay for its percentage rent. Because pop-up shops tend to be an extension of their online presence, landlords must consider any online sales derived from the tenant’s storefront presence. If the tenant produces large online sales in connection with its retail space, then landlords will certainly benefit from a percentage rent clause that includes online sales as part of gross.
The above is a summary of some of the items to consider when entering into a pop-up shop rental agreement. Our real estate attorneys at Schorr Law have a great deal of experience with real estate matters and disputes. To see if you qualify for a 30-minute consult with one of our lead attorneys, contact us today!