Pop-up legalities

Despite the increasing popularity of online sales, the continued need for a tactile, hands-on shopping experience has led to the increasing popularity of pop-up shops in both malls and street-front spaces.

Pop-up legalities

Despite the increasing popularity of online sales, the continued need for a tactile, hands-on shopping experience has led to the increasing popularity of pop-up shops in both malls and street-front spaces. The temporary nature of these pop-ups means that the legal relationship between the landlord and the pop-up tenant can more easily be secured through a licensing agreement instead of a detailed lease.

“It’s the market’s response to online shopping,” says Jake Ruddy, whose real estate development practice with Nelligan O’Brien Payne LLP in Ottawa focuses primarily on shared property and mixed-use developments. He senses that people still want to see, feel and touch products and interact with company representatives as they shop, allowing the merchandiser or promoter to put products in front of the buyer to help to drive more market share. “Shops that are entirely online are not accessing the entirety of the market and I think they realize that.”

In recent years, there’s been a drive for some sort of physical presence, often of a temporary nature. And these short-term shops — so-called pop-ups — are used not just for sales but also to introduce startups with new items and concepts and to promote products, ideas and events. And it’s everything from the mom-and-pop shop looking to test the waters with a temporary location to international brands wanting to create some excitement over a new product.

That has given the retail landlord more opportunities to fill otherwise empty space. The temporary offering might also bring more people to the area attracted by the pop-up hype. Some landlords have converted larger spaces to allow for small or temporary shops creating retail or food halls, like booths one might find at a convention.

The Retail Council of Canada highlighted the trend toward pop-ups in its 2017 study of the country’s shopping centres. It found temporary retail is becoming more common in Canadian malls. And while the not-for-profit organization that represents 45,000 businesses and merchants doesn’t typically represent temporary tenants, there is recognition that pop-up shops can be a boost to the sector overall, says Karl Littler, senior vice president of public affairs.

“We’re happy to see retail entities thriving, even if these are short-term ones or pilots, that might lead to longer-term retail offerings,” says Littler, a lawyer. They also help to retain existing retail stock, preventing space from being converted to other uses. However, he thinks it’s important for temporary businesses to properly distinguish the terms of their services and products because they may not provide the full retail experience, such as allowing returns. There are also no guarantees that permanent retail businesses are going to operate in perpetuity. “We’re hopeful that they’ll thrive and they’ll become longer-term retail operators and with that our members.”

Susan Rosen, a partner in Gowling WLG’s Toronto office, thinks back to the days prior to Target’s short Canadian sojourn. It began promoting its brand and a key designer during a two-day pop-up on Queen Street in Toronto. She’s since seen the approach used for musicians with branded material, returns and promotions and as a way for some brands to expand their physical presence at key times of the year, such as Easter, Halloween and Christmas. This allows them to keep their permanent space as is instead of having to clear an area for popular seasonal offerings.

“When people think about renting or leasing or licensing, you’re thinking about them selling a product. But it isn’t necessarily simply that. One of the most important things actually is the brand, the image, the hype which draws people,” says Rosen.

Space that is left empty and purposely unadorned by the landlord and serviced with hydro, plumbing and lighting, known as “vanilla shell,” can be quickly transformed using racks, tables and branding material to accommodate temporary needs. Licence agreements, she says, fit those needs. “They’re really personal agreements between two parties, and when you have a short-term situation you typically want that.”

But there are pros and cons for both the landlord and the tenant in the negotiation of temporary use of spaces, says Ruddy.

Individual considerations for the landlord include the traction the tenant has as a retailer, if the brand is known and any financial background. A landlord may want to seek a higher deposit from a pop-up, particularly one that isn’t so well known to the landlord to ensure the space is properly maintained and left in the same condition in which it was found, adds Rosen. For the tenant, ensuring the wording of the agreement reflects what they intend is important for them in getting that deposit back.

A commercial lease typically reflects a long-term agreement between a retailer and a landlord and anticipates a variety of eventualities as the tenant seeks property and land rights and a right of exclusive occupation. Many aspects of a lease — incentives for leasehold improvements, exclusive use and lease renewal or termination — may not all apply to short-term arrangements.

Rosen says the licensing agreement can be kept short and sweet. It does not include a right of exclusive possession of the space or an interest in land, but it can permit use or a portion of the landlord’s property. It also can’t typically be assigned. So, the negotiation for the pop-up tenant, who usually requires a space that can be transformed to fit their needs often in a very short period of time, doesn’t need to be as detailed and complicated.

“Pop-ups do happen quickly and the turnaround from a deal to opening a store can be quite quick, and I think that given simply the time pressures associated with the short-term and quick nature of a pop-up shop, the parties will want to settle an agreement quickly and, therefore, these licence agreements will continue to be used,” says Michael Gilburt, a senior associate at Blaney McMurtry LLP, whose Toronto practice concentrates almost exclusively on commercial leasing with the majority in retail.

Typically, a lease will lay out terms of the rent and address considerations such as property tax, utilities and insurance. This wouldn’t apply to a pop-up that only needs the space for a day or even six months. Another approach allowed through a lease is percentage rent, which reflects the volume of sales conducted in the space and may include related sales conducted online. A proportionate rate might also be reflected in rents for pop-ups, particularly for startups that are just getting a sense of their market.

Gilburt says landlords are often amenable to a percentage structure where a pop-up sells products directly from the premises. But it all depends on the situation. There’s no point in considering a percentage rent if the space will be used largely as a showroom or a return centre. Or the space may be used to drive online sales, which may include on-site use of tablets through which the customer can place their order for delivery. The landlord and the tenant then should determine how to capture those online sales.

“Parties are trying to grapple with that issue, in my experience” in the agreement when addressing the definition of gross revenue to include online sales for the purposes of calculating percentage rent, he says. Trying to capture the right amount or percentage of online sales that touch the store can be difficult and needs to be carefully worded, Gilburt says.

And while the licence agreement is designed as a simple way to formalize a short-term relationship, the landlord must ensure it doesn’t conflict with pre-existing tenants who have exclusive-use clauses. “So, the landlord has to be very, very careful about the exclusive use clauses and how you word them,” says Ruddy. Typically, he adds, landlords want to be as specific as possible to limit eventualities, while the opposite is true for the tenants, who want as much flexibility as possible.

A use-clause for the temporary tenant, therefore, can be important to restrict what the pop-up does and what they can sell in the space. And if it’s more of an experiential pop-up, Gilburt says they need to ensure that the applicable zoning and municipal regulations permit what they want to do, which may include applying for a liquor licence or an event licence.

“It’s important at the outset for both parties to be clear as to what the intended use of the intended pop-up space is going to be and for the tenant and the tenant’s perspective doing their due diligence at the beginning to ensure that . . .
the space is zoned to allow for all the various uses they’re intending to carry out and that the uses are permitted . . . by the landlord or the applicable regulations governing use in that space,” says Gilburt.


Licence agreements

What to consider in a licence agreement for a pop-up shop:
• A use clause for the tenant;
• Whether there are zoning or other regulatory requirements;
• The need for any special licences;
• Whether the rent is structured on a fixed amount, is based on a percentage of sales in the space and/or online and how that is captured or a combination of base rent and a percentage.

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