December 3, 2010
Article by Amy Armond - Holland and Knight
If you live in a metropolitan area, chances are that this holiday season you will notice more than just lights and festive decorations appearing around town: pop-up stores are a growing trend in retail that appears to be here to stay. If you're not particularly attuned to the retail scene, you may ask "What is a pop-up store?" Broadly, the term "pop-up store" is used to describe a retail venture of a temporary nature. If you're vaguely familiar with the pop-up store concept, you may be picturing a seasonal store – perhaps one in a mostly-vacant strip mall with a large plastic orange and black "Halloween" banner announcing its arrival.
In the past few years, however, the pop-up store has evolved from the typical seasonal store to a sophisticated and carefully calculated business tool – one that can take on any incarnation marketers can imagine. Retailers (and companies touting products that are not typically conceived of as falling within the "retail shopping" category) are using pop-up stores as vehicles for testing locations and markets, launching new products, and, most notably, for promoting and fostering brand identity. The fleeting nature of a pop-up store leads to the store's presence becoming newsworthy, thus creating buzz about the featured brand or product and planting urgency in consumers' minds to visit the store before it's too late.
Modern Pop-Up Stores Hope To Make the Season Bright
One example of a modern pop-up store is the temporary store that Pop-Tarts opened in Times Square in August 2010, which has been featured in numerous news stories over the past several months. In the store, consumers can not only consume Pop-Tarts (including special limited edition flavors) at the in-store cafe, but also participate in interactive features, such as an oversized vending machine-type display that allows consumers to create personalized "variety packs" of Pop-Tarts. The lease for the store reportedly runs through January 2011. Other pop-up stores planned for this holiday season include Toys-R-Us, which plans to open 350 "Holiday Express" toy locations across the country. Best Buy plans to open approximately 50 mobile outlets to accommodate holiday demand for its products. And Harry & David plans to open 16 pop-up "orchards" in major cities, where the fruit and gift retailer hopes to not only increase its sales but also revamp its image among urban consumers.
Need for Legal Guidance
For building and shopping center owners approached by retailers seeking to use space for pop-up stores, these temporary ventures may seem like the perfect solution to ongoing retail vacancies related to the recession and a useful tool for increasing traffic to shopping centers during the holiday season. Unfortunately, the temporary nature of pop-up stores may create the perception on both parties' ends that liabilities are limited, legal concerns are insignificant, or quick negotiation is paramount to consideration of details. Before simply following the pop-up store trend in merry measure, property owners and retailers should seek legal guidance to ensure that there exists an agreement which encompasses both parties' business goals and legal concerns.
Considerations for Landlords
Before entering into a pop-up store agreement, a building or property owner needs to consider carefully the impact that the store may have on the subject property. Aside from the obvious need for insurance coverage and indemnity provisions to provide protection from the potential liabilities that may arise due to the store's presence, an owner who is negotiating a lease or license agreement with a pop-up retailer needs to anticipate the effect that the store will have on the property and ensure that its attorney understands the myriad of issues that may need to be addressed in the agreement.
• One of the first considerations is whether the agreement should be structured as a lease or a license. The answer depends on the length of the term of the agreement, the potential for conversion to a long-term arrangement, and the extent to which a property owner is willing to grant an interest in (and allow an encumbrance on) the property.
• Another critical provision in a pop-up store agreement is the "use" language. From the landlord's viewpoint, such language needs to be crafted narrowly to avoid unexpected and undesired activities on the property. A shopping center landlord also needs to ensure that the pop-up retailer's proposed use will not violate any "exclusives" in favor of existing tenants. For a shopping center owner who desires flexibility to enter into pop-up store agreements in the future, it may be worthwhile to consider updating the lease form used for the property to except temporary uses from the exclusives granted to future long-term tenants.
• A landlord will also want to protect the marketability of the subject property to long-term tenants by including limitations on alterations and permanent fixtures, as well as language allowing the landlord entry to show the premises to potential future tenants. In addition, any landlord who has plans for future use of the property may wish to instruct its attorney to prepare particularly strict holdover provisions to avoid (or be compensated for) any detrimental effects of a pop-up tenant failing to vacate its space within the time frame provided for under the lease or license.
• There are also several practical considerations which might be missed by a property owner entering into a pop-up store agreement in haste: Should the agreement include terms relating to special events, media presence, crowd control, parking, safety issues, equipment and inventory loading and storage, or signage? Will the retailer be required to pay utility and maintenance costs? Should the retailer be permitted to assign the agreement?
• Lastly, a landlord will want to retain some modicum of control over its property, including the ability to impose rules and regulations to address safety issues and prevent any adverse effects that the presence of the pop-up store may have on other tenants.
To sum up, a property owner should not enter into a pop-up store agreement without thinking through the ramifications and consulting with an attorney who is aware of the issues surrounding these types of agreements. The aim is to ensure that the risk of any potential negative effects is sufficiently mitigated.
Considerations for Tenants
The primary concern for a retailer planning on opening a pop-up store will be protecting the valuable investment made in the store and ensuring its success, both in terms of sales and brand identity. Retailers can of course obtain business loss and liability insurance coverage to protect themselves when opening a pop-up store, but without a skillfully negotiated pop-up store agreement, a retailer may find that the business purposes of inducing sales and creating brand loyalty are thwarted by an agreement that is inflexible or fails to incorporate novel ideas to accommodate the special purpose of the business arrangement with the property owner.
• A tenant should first consider whether the agreement needs to be crafted to allow for extension of the term or transition to a permanent lease if the location proves highly successful. Including such options in a pop-up store agreement may streamline the negotiation of a more permanent deal in the future (if this is something the retailer is contemplating).
• Landlords generally contribute minimal build-out funds to pop-up tenants and demand that leases or license agreements state that the property is being taken "as-is." Even if aware of the implications of these business terms, a retailer should have its attorney attempt to incorporate as many protections as possible into the pop-up store agreement. For example, will the landlord at least warrant that the HVAC will function properly during the term of the agreement?
• Typical retail lease agreements may not address terms that are critical to a pop-up retailer's plans. For example, does the retailer need to be open beyond normal shopping center business hours to accommodate its customers or host special events? For a very short-term pop-up store, should the agreement include "back-up" dates if unforeseen circumstances prevent the store from opening on the planned dates?
• Apart from the agreement itself, a retailer seeking to open a pop-up store in a shopping center may wish to have its attorneys review any reciprocal easement agreements, exclusives or covenants affecting the shopping center to lessen the risk of the pop-up store's operations being challenged by permanent tenants of the center. In addition, a retailer should ensure that it is aware of all laws, regulations and codes that may apply to operation of the pop-up store. Are special permits needed? Does the locality in which the store will be located impose special sales or use taxes of which the retailer needs to be aware?
Do You See What I See?: Coming to Terms and Finalizing the Agreement
In navigating all of the issues outlined above, and in negotiating basic terms such as rent, the landlord and the tenant should each consider its rationale for entering the deal and ensure that its attorneys effectuate the desired business arrangements adequately and efficiently. Pop-up store agreements memorialize specialized business terms which may require an attorney to draw from several types of agreements as precedent and creatively construct a new document to comport to the particular deal at hand. Nonetheless, property owners and retailers can both achieve their business goals and increase the odds of a harmonious relationship (whether during the holidays or any other time of year) by using thoughtfully negotiated and competently drafted legal agreements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Specific Questions relating to this article should be addressed directly to the author.
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