News & Insights
Over the past several years, a growing trend in commercial real estate has been the phenomenon of short-term leases referred to as “pop-ups.” The trend has taken hold in big cities and midsize cities alike. In downtown Greensboro, the Wrangler Pop-Up Store on South Elm Street has drawn crowds since last fall with its trove of classic denim and certain limited-release collections. Tenants occupying these short-term pop-up arrangements represent a diverse array of business ventures, ranging from gourmet dining to traveling art installations. The varied nature of these businesses likely helps contribute to the buzz surrounding pop-ups. Additionally, pop-ups often benefit from a sense of urgency that often attaches to products or services that are held out as being “limited time” offers or opportunities.
While pop-ups are frequently hailed as being trendy, they also have an inherently practical side. Namely, the more temporary nature of pop-up style occupancy can attract tenants who may have otherwise been disinclined to enter a more traditional lease with a longer duration. As a result, landlords are increasingly able to fill spaces that were difficult to keep occupied. Certain types of businesses are particularly well-suited for short-term leases, such as seasonal operations like toy stores in December or tax accountants in April. These types of seasonal businesses are able to maximize their opportunities for returns by renting space during their peak operational windows during a given season or seasons without being stuck with the overhead of this expense during the quieter times of the year and without being beholden to one particular location or market for longer lease term. Rental amounts for shorter term leases tend to be a lower than those of longer terms. Thus, the pop-up lease can serve as an economical way for tenants to utilize space and efficiently market their products and services. Additionally, the tenants of pop-ups are provided the unique opportunity to introduce their products or services in markets that may have been previously untapped. As the downtown areas of many cities across the country have been revitalized during the past several years, pop-up leases allow businesses, old and new alike, to test the success of their operations in new neighborhoods. In turn, pop-up leasing can lead to increased exposure among wider audiences, which can help their businesses thrive and even expand. While many pop-ups are associated with new businesses, pop-up leasing has allowed larger retailers, such as well-established department stores, to dispense with excess inventory in an efficient manner that frees up the main store locations for new merchandise.
The benefits afforded by pop-up leasing are not enjoyed by tenants alone. As previously stated, Landlords are often able to lease space for shorter periods that would have otherwise remained vacant. Moreover, short-term leases, even those that are on a month-to-month basis, have the potential of yielding a long-term tenancy if tenant’s business thrives in the new space and the parties are amenable. Even if the pop-up lease does not result in a long-term lease with the pop-up tenant, the pop-up tenant’s business is still likely to attract attention to the property location and add to its appeal in the eyes of other prospective tenants. In short, pop-up leases allow tenants to explore new locations, and perhaps even new business models, that might have been deemed too financially risky due to the greater level of commitment and cost associated with a more traditional lease of longer duration. Furthermore, landlords can utilize pop-up leases to increase the overall desirability of the property.
However, while pop-up leases are often lauded as having considerable benefits for landlords and tenants, as well as being en vogue, there are a few caveats to keep in mind for those considering this type of short-term leasing arrangement. From the landlord’s perspective, it is imperative to consider to what degree it wishes to encumber the property. A license agreement could potentially be used in lieu of a pop-up lease agreement for situations in which the landlord has an interest in maintaining greater flexibility in its ability to remove a tenant from the premises. From the tenant’s perspective, if the intention is to remain in a space for a period of time longer than a year, then it is likely that a license agreement will not provide adequate protections and procedures as would be provided by a lease agreement. Similarly, Landlords might opt for a lease agreement instead of a license where the term is going to be of any considerable length. Another factor to consider is whether the premises will require any substantial modifications or improvements in order for the tenant to operate therein. The tenant of a pop-up will want to avoid costly modifications that will take time to both build and tear down once the lease ends. Similarly, the Landlord of a space that is well-suited for pop-up occupancies will likely want to avoid as much refit and repair between tenants as possible.
Once the parties decide which type of agreement best effectuates their respective goals for the property, it is critical that the resulting agreement is drafted in such a way that clearly and properly conveys the intent of the parties. Without proper drafting, a “license” may run the risk of being interpreted as a lease agreement. As with many areas of the law, the merely employing the title “License Agreement” atop the drafted document will not magically imbue said document with all of the provisions necessary to create such an agreement. Rather, both licenses and leases require particular language to solidify the respective intent therein. The major difference between licenses and leases hinges upon the language used in the agreement relating to the use and control of the property. A properly drafted lease, regardless of the length of its term, grants a leasehold interest to the tenant, whereby the landlord gives the tenant the right to possession and enjoyment of the property, often exclusively and for a defined period of time. By contrast, a license is non-exclusive, and does not afford the tenant any such possessory interest, or otherwise, in the property. Rather, a license is essentially the privilege to access the property and use it for a certain purpose. Consequently, a license agreement will allow the property owner far more control over the access and use of the property than an average lease agreement.
In summary, both parties must assess a variety of factors in deciding whether a short-term lease is a viable solution, including, but not limited to, the length of time that the tenant will need to occupy space, whether any improvements or alterations will need to be made to the premises, and whether tenant will need to acquire any permits in order to conduct its business. In some cases, a license agreement may be preferable to a short-term lease. In other cases, the parties may conclude that a more traditional lease with a longer term would best meet their respective needs.