Canada: Pop-Up Shop Lease Negotiations Give Rise To Unique Legal Issues

In recent years, the retail landscape has taken a novel turn with the rise of pop-up shops, which occupy retail space for short periods, anywhere from a few hours to over a year.

Luxury brands, online retailers, and celebrities alike have opened pop-up shops in locations as varied as shopping centres, trendy neighbourhoods, popular shopping districts, and even a moving downtown streetcar, showcasing the latest products and services one day, and disappearing the next.

Paired with the rapid spread of information on social media (often via teasers and mysterious references to "secret locations" with details to follow), pop-up shops have become a powerful marketing tool.

Pop-up shops bridge the gap between traditional brick-and-mortar retail and internet-based retail. An example is the men's suiting brand, Indochino, which initially started as an online retailer. Following its online success, Indochino entered the brick-and-mortar market, initially via a series of pop-up shops, which led to a growing number of permanent locations.

The rising popularity of pop-up shops has coincided with the growth of e-commerce, particularly as shopping centres and retailers now place a greater emphasis on the experiential aspects of shopping.

With the growth of online shopping, brick-and-mortar establishments are increasingly looking to broaden the shopping experience to include a more experiential element that will draw customers to their stores. Retailers look to their online elements as a means of distributing and marketing the products they sell, while a brick-and-mortar presence enables them to engage with their customers more directly. Pop-up shops, with the attendant buzz that often starts online and culminates in an interactive in-store experience, are an ideal medium for such engagement.

From a business perspective, pop-ups have compelling propositions for both landlords and tenants. While most landlords would prefer more stable, long-term tenancies, the pop-up provides an opportunity to generate rent from otherwise vacant premises. This is especially advantageous in light of the recent flurry of insolvencies across the retail industry.

Pop-up shops also enable landlords to vet potential tenants in advance, essentially providing a "trial run" before committing to a long-term lease. Landlords also benefit from increased customer traffic brought on by pop-ups, as customers come back to see the latest tenant and the latest products and services offered.

Tenants view the pop-up model as an effective means of gauging public reaction to new products, concepts and services, without the commitment of a traditional long-term lease. Pop-up shops also allow tenants considering expansion into an underserved area to determine whether the location is viable from a business perspective. For online retailers, pop-up shops provide a showroom for their products, which can then be purchased online (as illustrated by the example of Indochino).

Given the unique nature of pop-up shops, there are a number of legal considerations of which parties considering a pop-up relationship should be mindful. This article highlights a few of those considerations.

Use of the Pop-Up Shop

In any pop-up agreement, whether within a shopping centre, street location or other multi-tenant development, the tenant's right and ability to use the premises for its specific business, and the landlord's control of the various uses within the shopping centre or development, are among the most fundamental and important terms.

Principal among these provisions is the tenant's use clause. A use clause will restrict the tenant to using its premises for a specific purpose and may include a list of agreed-upon products or services that a tenant may sell in its premises.

A tenant will want to ensure the use clause is drafted as broadly as possible in order to retain the flexibility to adjust their product offerings to respond to consumer demand, implement a change in business strategy or carry out promotional events from the premises that include a variety of uses (such as the pairing of food and entertainment services with the sale of clothing).

By contrast, a landlord will want to ensure the use clause is very clear and specific to protect tenant mix within a multi-tenant development and to protect itself from breaches of any exclusivity rights granted to other tenants. For example, if the landlord has given another tenant the exclusive right to sell jeans, giving a pop-up tenant an unrestricted right to use the pop-up shop for any lawful purpose could result in a situation where the exclusive right is breached.

Parties considering a pop-up relationship should also undertake the necessary due diligence to confirm that the proposed use of the premises is permitted by applicable zoning and municipal regulations, particularly where the proposed use differs significantly from the manner in which the premises has been used previously.

The use of a pop-up shop may also require that certain licenses be acquired, such as a liquor license or an event license. In addition, while signage is an item that tenants often consider integral to the marketing impact of a pop-up shop, there are often restrictions imposed by municipal regulations and zoning legislation on the size, location, and type of signs that are permitted.

Accordingly, a pop-up tenant should begin its planning phase by gaining an understanding of how the municipality's regulations will affect its intended use of the space.

Type of Governing Agreement

Parties to a pop-up relationship should be mindful of the advantages and drawbacks of the various types of agreements that can be used to document such an arrangement.

A pop-up relationship may be documented in the form of a license agreement, which permits the grantee to use a portion of the grantor's property for a certain purpose for a limited period of time. A license, as opposed to a lease, does not include a right of exclusive possession of the space and does not create an interest in land.

While leases are complex documents, licenses are relatively uncomplicated and may be suitable for a relatively simple pop-up arrangement with simple business terms. A license is also advantageous to the landlord who needs flexibility while looking for a permanent tenant, as it generally allows a landlord to terminate the arrangement at will, upon reasonable notice.

Leases, on the other hand, do create an interest in land, and include a right of exclusive occupation. The downside in a pop-up relationship is that given the complexity of a lease, it may take longer to negotiate and draft when compared to a license. A lease is also not as flexible from a termination perspective, as terminating the landlord-tenant relationship inherent in the lease may be more complicated than doing so in a license arrangement, from both the landlord and tenant's perspective. It does, however, afford the opportunity for greater protections for both parties and is recommended if the business arrangement is more complex and greater safeguards are required.

Despite what the parties may call the arrangement, whether an agreement is a lease or a license depends on the substance of the agreement. Clarity and precision in drafting are essential in order to avoid misunderstandings and unintended consequences. Improper termination of a lease or license can have adverse consequences, including a claim for damages.

Percentage Rent and Online Sales

A common rent structure under many pop-up agreements involves the payment of rent based on a percentage of the tenant's sales of merchandise and services from the pop-up shop (referred to as "percentage rent").

Many tenants, particularly start-ups and online retailers looking to test-run the viability of a brick and mortar location, prefer a percentage rent structure over a fixed rent structure as the rental payment correlates directly with the success of the tenant's business and will preserve the tenant's cash flow (percentage rent is typically paid after the fact based on a report of gross sales figures for the relevant period). Accordingly, if the pop-up shop underperforms, the payment of a percentage rent will be less burdensome to the tenant. However, for the same reason, such a rental arrangement has the potential to leave landlords with little to no rental income. Nonetheless, in the right circumstances, a landlord may decide that a percentage rent structure is viable for a pop-up shop, particularly in the case of a high-profile brand that has a demonstrated track-record of success and holds the promise of attracting more customers to the development.

Once the parties to a pop-up relationship have agreed on a percentage rent calculation, they must turn their minds to how "gross sales" will be defined in the pop-up agreement. The types of transactions that are included and excluded from the definition of "gross sales" will have a significant impact on the amount of percentage rent a tenant will end up paying. Accordingly, a tenant will want to limit this definition as much as possible while a landlord will want to broaden it as much as possible.

For pop-up tenants with a strong online presence, it is important for both parties to understand how online sales will be treated and accounted for from the beginning so that both parties can determine whether a percentage rent structure makes sense and, if it does, what types of online sales activity should be included and excluded from the definition of "gross sales".

Given that online sales are an area where many pop-up tenants primarily focus their business, the failure to capture these sales in the definition of "gross sales" may result in lower rents than a landlord had anticipated. By contrast, a definition that captures all forms of online sales may result in a rent that far exceeds the tenant's budget. Accordingly, tenants should seek to exclude all online sales of merchandise except those which are made through the tenant's in-store point of sale system and fulfilled at the premises.

Landlords, on the other hand, should seek to ensure that "gross sales" captures all internet sales that 'touch the store', particularly in the case of pop-up shops which are operated as showrooms. For example, purchases made by customers in a pop-up shop through store-owned tablets which are fulfilled with merchandise at a distribution centre may 'touch the store' but may not be registered as sales through the in-store cash register. As this example illustrates, there are many ways an online sale can 'touch a store'. How the parties distinguish between online sales which are included and excluded from "gross sales" will depend on the nature of the operations of the pop-up tenant and the negotiating leverage of the parties.

With the continued evolution of consumerism toward experiential marketing and the emergence of e-commerce as a viable secondary retail channel, it is clear that the pop-up phenomenon is no flash in the pan. With its understanding of the unique business and legal issues facing the parties in a pop-up relationship, the Commercial Leasing Group at Blaney McMurtry can help landlords and tenants successfully navigate these issues and prepare the legal documentation necessary to achieve their goals.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
8 Nov 2018, Conference, Toronto, Canada

This year’s program is entitled “An Analysis of Fidelity Claims for the Modern World.” The program will address important substantive and practical issues germane to today’s fidelity claims handling.

Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions