By: Tin-Fu (Tiffany) Tsai, guest author. Reprinted with permission from: Entertainment, Arts and Sports Law Journal, Spring 2020, Vol. 31, No. 2, published by the New York State Bar Association, One Elk Street, Albany, NY 12207.
When Kenneth Cole first showcased his new line of shoes in his friend’s trailer under the disguise of a production company during Market Week in the ’80s, it was meant to be a temporary alternative to a pricey showroom. Nowadays, displaying products in an unconventional store setting for a limited time period—pop-up stores—is more than a preliminary solution, but rather a game-changing retail strategy. This is because pop-ups not only create a sense of excitement but also help the retailer reshape its real estate planning.
Maintaining leases is tricky for retailers, especially in the retail apocalypse era where they struggle to adjust to shifting shopping habits and exponential e-commerce growth. One of the takeaways from the recent bankruptcies of Barney’s and Forever 21 is that expensive leases can drain a retailer, no matter at which end of the spectrum it sits. This is why more and more landlords and tenants are drawn to the pop-up concept, which provides more flexibility in the retail network with lower costs and risks. Landlords see pop-ups as a revenue source for what could be vacant properties as well as a chance to vet tenants for potential long-term leases. Tenants are able to gauge market reaction towards their products and test the feasibility of the store locations. Bridging the gap between brick-and-mortar and online platforms, the pop-up arrangement, though not a brand new idea, has already become a pillar of the retail landscape.
Fashion brands are constant players in the pop-up game. Tiffany & Co.’s signature blue box just added men’s collection at its first men’s pop-up on 5th Avenue. Chanel launched an all-red pop-up displaying limited-edition beauty products in midtown New York. Louis Vuitton’s neon green downtown Manhattan store, presenting Virgil Abloh’s Fall 2019 collection, was just one out of a hundred pop-up arrangements last year. While companies such as Appear Here, Storefront, and Popuphood facilitate the process, brands should factor the unique implications that come with pop-ups.
Lease or License
Two options dictate the legal framework of pop-ups: leases or licenses. Essentially, the difference between the two is that a lease grants the tenant an exclusive and irrevocable right to possess the premises, whereas the possession right is not absolute and can be revoked at will under a license. As a result, a landlord under a lease has to go through the often costly and time-consuming court proceeding to evict a tenant, while under a license using self-help is usually sufficient. After the Housing Stability and Tenant Protection act of 2019 was enacted, ousting a tenant with a lease will be even more difficult and unpredictable as the court proceeding is prolonged and the court has more discretions. Since pop-up deals tend to move fast, a license can be a simple way to document the legal relationship between parties as compared to a lease. Nevertheless, both parties should be mindful that the court will look at the substance rather than the name of the documents when deciding the nature of the tenancy.
Instead of thinking about who their neighbors are, brands should focus more on their customers’ lifestyles when selecting the store locations. Gucci’s pop-up with Dapper Dan in Harlem reflected the recognition of the cultural significance of the region. A database was created as a result of Introduction 1472 passed by the New York City Council in 2019, also known as the “storefront tracker” bill, may be useful for storefront searches as it provides information on the vacancy status, lease terms, size, and economic activities of the stores.
During events like Fashion Week brands face high competition when establishing a temporary store. Since time is of the essence, the delivery date of the premises should be spelled out. A tenant may wish to terminate the lease immediately without penalty when occupancy does not go as planned. Besides the right to terminate, the right to renew can be crucial from a tenant’s perspective should the business profitable.
Rent and Operating Expenses
Rent and operating expenses in a pop-up arrangement are usually fixed as they are determined in advance. The purpose of this structure is to align with the short occupancy period since time is too limited for the landlord to reconcile expenses later. An alternative is for the rent to be calculated as a percentage of sales, which should be carefully defined. Additionally, the prepayment of rent upon the tenant’s occupancy is fairly common as a way to mitigate the risk in rent collection given the quick time frame of pop-ups.
The pop-up arrangements should set forth the permitted use in detail, like the hours of operation, so that the tenant’s intended use is well-covered. A landlord should ensure that granting certain use to pop-up tenants will not interfere with the exclusivity rights of existing tenants, especially those of anchor tenants. Revisiting and modifying the use provision under current leases can be beneficial for landlords who intend to utilize the pop-up model more in the future.
Delivery of Premises
In addition to asking the tenants to accept the property “as is,” landlords typically offer no tenant allowance given the short life circle of pop-ups. To maximize the time, it is recommended to start the process of getting necessary approvals and permits early on. The incorporation of certain indemnity language in the pop-up arrangement can be effective in balancing the risk of potential violations and the speed of pop-up deals.
Considering the limited resource it has under the pop-up arrangement, a tenant should conduct a complete inspection of the property or cap the repair costs before taking on the responsibility of maintenance. Furthermore, the landlord’s representation and warranty confirming that certain system is in good and working conditions will be helpful in limiting the tenant’s responsibility for repair.
The retail apocalypse can be a chance for civic innovation and community reform. The pop-up model provides one solution, which bears a mission to attract customers’ attention and help brands stay relevant. Creative use of real estate is the key component of the unique in-store experience that customers crave. Yet, how to keep customers engaged without causing “information fatigue” will be another challenge, particularly when pop-ups become a common element of the retail landscape. Pop-ups can take various forms—stand-alone shops, department store booths, or even virtual pop-ups on-line—but no matter what the form, the brand who plays it smart is the one to stay.
Tin-Fu (Tiffany) Tsai has in-house and law firm experience both internationally and in the U.S. Currently, Tiffany leads the legal department of Arris Properties Group LLC, a New York-based real estate development company, and advises on various transactional and litigation matters. Her practice concentrates on financing, acquisitions, leasing, licensing, as well as real estate litigations. She is a 2015 graduate of Columbia University School of Law and a 2008 graduate of National Taiwan University, the top one law school in Taiwan. As the new Co-Chair of EASL’s Pro Bono Committee, she hopes to leverage her international background and connect art professionals with legal practitioners as well as law students who are interested in exploring the creative world.