"Pop-Up" Leasing: Practical Considerations,

Key Provisions for Landlords and Tenants

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TUESDAY, JANUARY 28, 2020

Presenting a live 90-minute webinar with interactive Q&A

Robin Abrams, Vice Chairman and Licensed Associate Real Estate Broker, Compass, New York

Glenn D. Wright, Principal, Wright Law Firm, New York

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Pop-Up Leasing: Tips for Drafting and Negotiating Short-Term Leases or License

Agreements

5

Pop-Up Stores

Allow brands to:

• Open a store on a short-term basis with minimal risk, often at a reduced rent

• Create an experience – showroom and/or retail

• Showcase product

• Build brand awareness

6

Space Requirements

• Physical space – must be in move-in or “white-box” condition

• Basic requirements include: restroom(s), utilities (including HVAC), an acceptable storefront and often some level of finishes (floors, ceilings, lighting)

• Tenants require a rent concession period to prep the space, often making improvements specific to their needs, with branded fixtures and finishes

• Tenants also need to design and install approved signage/awnings

• Landlords generally do minimal work7

Other Requirements

In addition to securing the space, tenants must also deal with:

• Tenant work needed to prep the space, including hookups to phone/ internet service, alarm systems, etc.

• Staffing the space

• Merchandising the space

• Activating the space – including special events, which may require special approval, temporary liquor licenses, etc.

8

The Real Real SoHo pop-up

Unilever’s Magnum SoHo pop-up9

Sennheiser pop-up Casper Mattress SoHo pop-up

Google pop-up Birchbox pop-up 10

Timberland’s Flatiron pop-up

Uniqlo Highline pop-up 11

ThirdLove Pop-Up Sarah Flint Pop-Up 12

Zola Pop-Up St. Ives Pop-Up13

Mirror Pop-Up Snowe Pop-Up14

Live Pop-Up

Lumniox Pop-Up15

Showfields

16

Storefront

Appear Here

uppercase

Building a homepage is one thing, build a storefront is another. We combine real estate and retail data

to provide access to up-and-coming and sought-after neighborhoods. We know where your next store

should be, what times you should be open and even how to create data-informed merchandising plans.

17

Guesst

18

Definitions

• For tenants in short term leases or license agreements (“Tenants”)will be used interchangeably for both lessees and licensees and landlords (“Landlords”) will be used interchangeably for both lessors or licensors.

• Leases or licenses will collectively be known as (“Agreements”)

19

What are Pop-ups?

• Frequently used by online retail businesses experimenting with opening a brick and mortar store

• Simon Property Group, for example, in their Roosevelt Field Mall offers a “scalable retail platform” called The Edit—a pop-up space that allows e-commerce startups to “test drive” their physical products in front of shoppers. Pop-ups such as this can increase foot traffic to the mall’s other retail stores.

20

Pop-Up as Trial Run

• Does the Tenant want the option to turn this leaseinto a long term one if the store is successful? Thepop-up tenant should attempt to negotiate that upfront (not after the concept is a runaway success).

• Does the landlord also own or manage nearbybuildings? If pop-up is successful, the Tenant canrequest an option to move to a nearby, lessexpensive space, to capitalize on the buzz.

• Regardless of success or failure, the response tothe brand in a pop-up will guide Tenants in makingmore informed decisions about future growth.

21

Examples of Pop-up Licenses

• Pop-up retail licensees may not even have adesignated space. Upscale department stores havedesigner retail pop-ups on their sales floors; food hallshave many vendors akin to a co-working space. Bigbox stores like Best Buy have salesmen from manycompanies on the sales floor.

• Given the rise of e-commerce and the decline of retailstores, malls and shopping centers are competing forcustomers and need to present more of a vibrantmarketplace model.

• Pop-ups could also be temporary art installations

22

Advantages for Tenants

• Opportunity to utilize novel/memorable space they

otherwise would not have access to because of the high

rent. Lower rent because Landlords offer pop-up space

at below-market rent in exchange for them having the

right to quickly evict if the right tenant comes along.

Licenses easier to negotiate than leases-lower

transaction costs.

• Retailers can open their pop-ups close to large events

such as art fairs or seasonal attractions.

• Can experiment with a unique or novel high-conceptexperience for the increasingly demanding consumer.

23

Advantages for Landlords

• Landlords can wait longer for:

• an ideal tenant,

• the market rent to rise, or

• appeal for a zoning change to enhance the use of the space

• Temporary activations also increase foot traffic to the space, which is appealing to Landlords. For residential properties, pop-ups are a revenue-generating alternative to open houses.

24

Landlord’s Concerns

• Parties should note that, because of the short-term nature of the Tenant’s operations, there will frequently be a willingness by the Tenant (or even the Landlord) to accept certain risks based on the lengthy process or expense related to obtaining a required consent or permit. This could also happen with signs and other approvals.

• For this reason, Landlords should include strong indemnification provisions (and personal guaranties) to protect against liabilities resulting from the failure of the Tenant to comply with a municipality’s requirements.

25

Landlord’s Concerns

• Landlords should review their mortgage documents to confirm that leasing to a pop-up store will not violate any loan covenants.

• Landlords should also review the exclusivity provisions in leases with their existing tenants to ensure they will not breach any restrictions by leasing to a pop-up.

26

Landlord’s Concerns re: Use

• The landlord should consider where such pop-ups are located within a mall or shopping center so as to not interfere with the aesthetics of the mall or concerns of long term tenants.

• Whether a certificate of occupancy would be required, and whether the use of the space and/or approval of the tenant is subject to the approvals of a tenant association.

27

Tenant’s Concern re: Use

• Tenants should apply as early as possible to obtain any permits and approvals that may be required due to their intended use. Depending on the nature of a tenant's use, it may be necessary to obtain a business license from the municipality or coordinate inspections by the local Fire department (open flame permit) or Health department.

• If the pop-up has outdoor space or encroaches on public land, the Tenant may need municipality or Building dept. approval

28

Tenant’s Concern re: Use

• Most short-term leases will state the permitted use veryspecifically and will also typically prohibit any other use of thespace (the Tenant’s business plan is not going to evolve over along period of time)

• Overall, retail use clauses are becoming broader to

accommodate “customer experiences” in line with the vision

or branding of the tenant.

• Use clauses for online retailer pop-ups: may want to include

area for returns, shipping of omni-channel goods, alterations

of clothing and a delivery hub.

29

Tenant’s Concerns

• Tenants are concerned about the condition of the space and whether anything will need to be removed.

• Spaces designed for pop-up Tenants are usually constructed as a “vanilla box” that are built out to house a variety of products and to facilitate the process of a quick turn-over of Tenants. Tenants will have to take the spaces “as-is” or else be willing to make any necessary improvements. Generally, no long-term improvements are done at the location and occupancy typically starts within days of execution of the Agreement.

30

Tenant’s Concerns

• When the Tenant needs the premises in “as-is” condition, they typically do not have the time to undertake any cleaning or repairs, so they will require that the premises be delivered in “broom clean” condition with all mechanical, plumbing, electrical, HVAC, and other systems in good working order.

• Landlords always try to include the right to delay delivery of possession to a tenant in the event that the landlord cannot turn over the space to the Tenant as scheduled. Those provisions would not work for pop-up tenants

• Casualty Clause- In a pop-up lease or license, the Tenant will want the right to terminate the agreement in the event of a fire or other casualty rather than having to wait around for Landlord to rebuild.

31

Landlord’s Concerns re: Expenses

• For pop-ups, Landlords should calculate what CAM charges or additional rent would be for space, and then add that amount onto the base rent of a pop-up. Passing through taxes, insurance expenses, common area maintenance, and similar charges to the Tenant is not practical and burdensome.

• Since Landlord is building expenses into the base rent, it should include caps on utilities in the space. The Agreement should address whether the Tenant will be installing new risers to increase the electricity, or using an excessive amount of water.

• Because of the temporary nature of a pop-up lease, many concepts common in commercial leases are not practical for a short-term lease.

32

Tenants concerns re: Expenses

• The rent for short-term leases is often charged on a “gross” basis with just a base rent. Some pop-up agreements leases may require the Tenant to pay all charges for sewer, gas, electricity, telephone, and other services and utilities.

• Just as its not practical for the Landlord to apportion these costs over a short period of time, it not practical for the Tenant in a pop-up space. By the time the Tenant obtains service, the Tenant has probably vacated the site. This is also true for hauling, dumpster, and carting expenses. As with CAM charges, taxes, and landlord’s insurance, these costs should be built into the base rent.

33

Landlord’s Concerns

• Most short-term leases will require that the tenant obtain and keep in full force and effect commercial general liability and property insurance with a licensed carrier and workers compensation

• Landlords often reserve the right to enter on not less than 24 hours’ notice, except in the case of an emergency. This may be acceptable for a two-week lease but would not be feasible for a one- or two-day short-term lease.

• Short term Tenants may not care about the space as much as a long term tenant would. Landlords want liberal access to premises to ensure that pop-ups don’t cause any damage or environmental hazards to the premises. Landlord will ask for personal guarantees for Tenants with indemnification clauses for property damage that survive the end of the lease.

34

Tenant’s Concerns

• Landlords may seek to insert a short-term lease’s maintenance provision that requires that the tenant keep the premises in good condition, including lighting, heating and plumbing fixtures, and any HVAC system and sprinkler systems, in good order, condition, and repair.

• Tenants should object to this because they typically do not have the resources to handle these issues if something breaks down during their tenancy. They should negotiate that the Landlord provides all necessary maintenance on an expedited basis if the required repairs adversely affect Tenant’s business.

35

Landlords Concerns

• In pop-ups, holdover penalties and personal guaranties should be included in the Agreements.

• Thee should be no assignments or sublets

• If applicable, short-term leases will require the Tenant to comply with shopping center or mall rules, and Landlords will reserve the right, in their discretion, to relocate the pop-up Tenant, change signage or restrict the Tenant’s use of common areas.

36

Relocation and Recapture Rights-Revocations of License Agreements

• Landlord’s right to recapture space or relocateLicensees is common in license agreements. As theseare short term agreements and the Landlord bears therisk of the long term overhead on the space, Landlordmust maximize value to benefit a flexible portfolio oftenants.

• If pop-up Tenant-licensee in a shopping mall ormarketplace spends a significant amount on anexperiential concept and is then relocated or evicted,the agreement could provide that the Landlord wouldreimburse the tenant for an unamortized portion of thebuild-out cost. Generally, the shorter the term, theless brand-specific and costly the build-out will be.

37

Tenant’s Due Diligence

• Access to the space

• restrictions on painting and cosmetic work

• What is the tenant’s duty to restore at end of lease

• Will Tenant’s operations need an excessive amount of electricity, water, an open flame?

• How much notice must Landlord give if it wants toterminate Agreement.

• Prior use of premises. If location has a history ofcomplaints from neighbors, Tenant may beinheriting a problem.

38

Negotiating Rent

• A new or online retailer starting a pop-up is anunknown commodity. Neither Landlord or Tenant wantto commit to a long term lease. One solution is thatthey may negotiate a rent to include a percentage ofgross sales. If the pop-up is primarily a showroom, theLandlord, in lieu of gross sales, could also request apercentage of online sales during the time that thepop-up is operating.

• Landlords could require the Tenant to estimate its rentbased on a "gross up" of its anticipated sales. TheLandlord will not want to chase a pop-up for itspercentage rent after Tenant has vacated space.

• Some Landlords think this too much trouble for a shortterm rental.

39

Compliance with Laws

• Landlord should make representations as tobuilding code compliance and the certificate ofoccupancy. Tenant’s build-out for pop-upsgenerally merely aesthetic, not to bring space upto code.

• Potential problem where pop-up Tenant usesrepurposed space previously zoned for office ormanufacturing use and in creating a pop-up storemakes the space a place of publicaccommodation. Who is responsible for ensuringthe space is ADA (American with Disabilities Act)compliant? This should be in the lease or license.

40

Options in Pop-up Agreements

• Extension - if Landlord still does not havelong term tenant and pop-up is profitable

• Expansion - especially in marketplace orfood hall concepts, move to larger space

• Early Termination – both Landlord andTenant usually want flexibility. No right forthe pop-up tenant to assign or subletspace, If Tenant wants an earlytermination, landlord would recapture.

41

Revocability of Licenses

• Many pop-ups are licenses. A license is the right to use a

space that is revocable by the Landlord pursuant to NY

Real Property Actions and Proceedings Laws Sec. 713.

• A landlord can give the licensee a ten-day notice to

vacate. If Licensee does not leave, Licensor and can

then resort to self-help by locking out the licensee or

barring them from gaining access.

42

Evictions of Leasees

• A lease gives a Tenant possession and greaterrights than a licensee.

• Unlike a licensor, a lessor using self-help to evict apop-up lessee is taking a huge risk. The leasemust contain precise language regarding this. TheLandlord must still litigate and therefore mustjustify its self-help to the Judge presiding over theeviction case.

• NY Real Property Actions and Proceedings LawsSection 853 states that Landlords can face trebledamages if a Tenant succeeds in proving that theeviction was unlawful.

43

Will a Court treat your Agreement as a Lease or a License?

• Attorneys drafting agreements for pop-ups have to keep inmind whether the document will be interpreted by a Court tobe a lease or license. Courts in New York look beyond the titleof a document to define it. Even if an agreement is referred toas a lease throughout, if it has the qualities of a license, it willbe treated as a license. Courts generally rule that a documentis:

• (i) a lease if the agreement is for use exclusively under theTenant’s control for a set period and

• (ii) a license if the agreement is for use not exclusively underthe Tenant’s control which is terminable at will.

44

Lease or License?

In American Jewish Theatre Inc. v. Roundabout Theatre, Inc. 203AD 2d 155 (NY App. Div. 1st Dept. 1994) the Court stated that“what defines the relationship is not its characterization oftechnical language used in the instrument but rather the manifestintention” of the parties. The Appellate Court wrote 'The natureof the transfer of absolute control and possession is whatdifferentiates a lease from a license or any other arrangementdealing with property rights whereas a license connotes use oroccupancy of the grantor's premises, a lease grants exclusivepossession of designated space to a tenant subject to rightsspecifically reserved by the lessor. The former is cancellable atwill without cause."

In this case, the document was called a license, the tenant had asix month fixed right to use the space that was not revocable atwill; the Court held that the relationship was a leasehold.

45

Lease or License?

In a more recent case, Nextel of N.Y. v. Time Management Corp. 297 A.D.2d 282 (N.Y. App. Div. 2d Dep't 2002), the Supreme Court, Appellate Division, Second Department, found that a rooftop cellular agreement was a lease, not a license, because the contract contained provisions typical of a lease and conferred rights well beyond those of a holder of a license or a temporary privilege, such as having a designated area completely under their control of Nextel with Nextel employees having unfettered access to the space.

46

Lease or License?

• Many courts will look at the equities of a situation whenmaking decisions. In Blenheim LLC v. II Posto LLC, 827N.Y.S.2d 620 (N.Y. Civ. Ct.2006), the Civil Court of the City ofNew York County found that a provision in a lease giving arestaurant a license to use vault space revocable at will to beunenforceable.

• The Court concluded that the landlord knew that since thetenant needed the vault for its compressors, hot waterheaters, and elevator machine equipment, the vault spacewas, therefore, necessary for the tenant to use the premisesas a restaurant, it was irrevocable. Accordingly, where thelease is dependent on the license, a court might equitably rulethat there should be greater protections for the tenant.

47

Lease or License?

In the case of Union Sq. Park Community Coalition, Inc., v. N.Y.City Department of Parks and Recreation, 97 N.E.2d 142 (N.Y.2013) the New York Court of Appeals found that an agreementbetween the City and a restaurant was a license, not a lease.Although the document was entitled "License"; it had a 15-yearterm and a payment structure including a percentage of salesthat resembled a lease. But also, in the agreement, the Cityretained the right to terminate the relationship at will on twenty-five (25) day written notice as long as its reasons were notarbitrary or capricious.

In examining the distinction between a license and a lease, theNew York Court of Appeals cited the revocability of theagreement as a significant factor in its decision.

48

Other Factors Courts look at in determining Lease or License?

• In East Ramapo Cent. School Dist. v. Mosdos Chofetz Chaim, Inc.

36 NYS 3d 344 (2016), the Supreme Court of New York, Appellate

Term, Second Department found that an agreement was a license,

not a month-to-month lease. The School District sought to evict the

plaintiff as a licensee under a RPAPL 713(7) 10-day notice to quit.

Plaintiff wanted 30 days' notice based on an argument that they

were a month-to-month tenant.

• The court found that the terms of the parties' agreement

demonstrated it was a license. The terms the Court looked at were

the short term duration of the tenancy, the limitations on the

premise's use, the fact that the agreement was not assignable. The

right of the school district to enter at any time and to revoke the

tenancy without notice in the event of default was also a factor in the

Court's decision.

49

Lease or License?

The Supreme Court of New York, Appellate Term, SecondDepartment in the matter of JCF Assoc., LLC v. Sign UpUSA, Inc. 59 Misc. 3d 135(A)(2018) indicated that it wasdisregarding labels and terminology in the agreement. Thiscase related to a billboard. It is standard practice to refer tobillboard agreements as “leases”, the parties as “Lessor"and "Lessee" and money paid as "rent."

The Landlord had filed a holdover proceeding to evict. Asthe Agreement was revocable by Landlord, the Court (andthe Appellate Court) found that the agreement was alicense, not a lease, and the parties had not established alandlord-tenant relationship.

50

Lease or License?

The Supreme Court of Putnam County ruled in Zaslansky

v. Zakkaya LLC, 41 N.Y.S. 3d (2016) that a tenancy

agreement was a license and not a lease. Plaintiff was

being evicted and sought an injunction only available to

lessees. However, the court carefully weighed factors such

as whether the revocation of the contract was contingent

on a default, access limitations, relocation rights, and

control issues and found that the agreement was a license,

not a lease and denied the injunction. This was despiteexplicit language defining it as a lease.

51

Other types of Pop-ups New York City Food Halls

• Currently, in New York City, for a food hall with multiple

vendors, each vendor is responsible for its own City food

establishment permit. As this concept grows, many in the

industry anticipate that laws will adjust so that the City

will let the Landlord who curates the food hall and

chooses the vendors be the holder of one permit for the

entire space.

• In this type of operation, similar to the co-working space,

vendors are licensees, not lessees, and the Landlord is

responsible for signage and maintenance and repairs of

entire premises.

52

Co-Working Space

• Co-working and flex office could be considered a pop-up space.

• Co-working spaces are almost always license agreements.

• As a percent of total leasing, flex space has grown significantly over the past five years, from 1.4% in 2014 to 10.7% in 2018 and that sector accounted for 21% of all Manhattan leasing in the third quarter of 2018 (and growing)

• As strategies and models have changed over the past several years, the average size of co-working and flex office transactions has grown at staggering levels.

• WeWork transactions in 2018 have averaged about 95,000, up 121% since their inception in 2010. The remainder of the flex space providers have had a different trajectory, averaging just 30,000 sf with a growth rate of 70% over the same time frame. With WeWork’s recent troubles and its recent attempts to shed space, that market share will likely change.

53

Co-Working Space

2016 1.35%

2017 1.69%

2018 2.42%

COWORKING/FLEX AS A PERCENT OF MANHATTAN INVENTORY

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018YTD

MS

F

Manhattan Boroughs

COWORKING/FLEX AS A PERCENT OF MANHATTAN LEASING

LEASING BY COWORKING/FLEX

2014 1.45%

2015 2.37%

2016 1.80%

2017 2.44%

2018 10.70%

*

*Data through Q3 2018

54

Thank You

55

Robin Abrams

robin.abrams@compass.com

Glenn D. Wright

glennwright@wrightlawfirmnyc.com