There are a lot of reasons for developers to embrace these temporary spaces, but due diligence is required.
Pop-ups and short-term uses for commercial property have grown from a trendy concept into a means of monetizing vacant or underused spaces. Moreover, as improved and varied amenities have become a priority for commercial and residential tenants, real estate developers are starting to reframe how they think about existing and future development.
Creating an environment is as much an art as it is a science, and achieving it requires rethinking decades-old philosophies on return on investment. The benefit of these activations may be difficult to quantify, but their importance to creating a place is unquestionable.
However, establishing a pop-up haphazardly could make short-term uses unjustifiably expensive and risky. Done right, short-term uses can breathe new life into any development.
To successfully incorporate short-term uses into a development, due consideration must be given to any approvals needed by the local government, as well as the drafting and negotiation of the lease or license agreement.
Zoning and Regulatory Considerations
Before negotiating with the potential short-term user, it is critical to know what type of short-term uses are allowed in your jurisdiction. The analysis should begin with understanding whether the use is permitted by right or whether some form of approval or entitlement is necessary. For example, if a restaurant is allowed within your building by right, then adding a pop-up restaurant is only a question of the duration of occupancy and not use.
Short-term activations are popular in planned unit developments, which strive to establish a sense of place and often encourage activations. However, some jurisdictions limit uses to only what was agreed upon in the development approvals. Many older planned developments that are now looking
to revitalize may not include a provision allowing short-term uses in their approvals.
Adding a new structure or use may require amendments to the underlying entitlement, which can be costly. Even if there are no immediate plans for temporary uses, developers currently in (or planning to engage in) the entitlement process should consider incorporating flexible approvals that allow for temporary uses to prevent the need for amendments later.
Given the positive financial impact of these short-term activations, economic development groups in various jurisdictions are becoming more attuned to the rise of pop-ups. They can advocate for streamlined or simplified processes. This is particularly true in jurisdictions with zoning ordinances that have not been updated in decades. In addition, landlords should investigate whether there are administrative solutions, such as obtaining a determination from a jurisdiction that the proposed temporary use is in substantial conformance or compliance with the underlying entitlement.
Before interacting with the local jurisdiction, try to ascertain the duration of the use. Everyone has a different definition of “temporary.” Some view an activation as a weekend event, while others consider it a land use until the ultimate planned development is delivered, which could take years. Some zoning ordinances will include provisions that allow for temporary permits, which are subject to less scrutiny, if the activation is limited to a few weeks.
Even if zoning approval is not necessary, most jurisdictions will still require site plan and building permits. While zoning may be a gray area that can be negotiated, jurisdictions will typically not waive or modify health, building and fire code requirements. Seeking exceptions from these public safety codes can add costly and long delays. It is essential to give attention to what will be required to satisfy these codes up front during the zoning process. Some codes do not distinguish between temporary uses. Therefore, certain issues, like limitations on land disturbance that trigger other requirements such as stormwater management, may be triggered if not contemplated upfront.
Drafting Considerations for Pop-Up License Agreements
In addition to municipal code requirements, owners and potential tenants should pay particular attention to the drafting of the terms and conditions of the lease or license agreement.
Many pop-up arrangements use license agreements rather than retail leases. A license agreement provides the licensee the right to occupy a space temporarily while possession of the property remains with the licensor. If the parties intend to enter into a license agreement, they must pay particular attention to the drafting as courts often ignore titles and review the language carefully in determining whether a document titled “license agreement” is actually a lease.
Unlike a conventional retail lease, license agreements are typically short and avoid many controversial issues, eliminating the time and expense of lengthy negotiations. For example, common-area maintenance expenses are not practical for short-term pop-ups operating for a few hours or days. Moreover, the time it would take a tenant or licensee to set up utilities and other services may exceed the term of occupancy.
Businesses entering into license agreements must understand that landlords will likely resist accepting certain tenant-friendly provisions common in leases, such as alteration, assignment, sublease and holdover rights. Landlords have limited remedies for defaults in license agreements and should require considerable security deposits, guarantees and indemnifications from the licensee, which will survive the termination of the agreement or term of occupancy.
Since a license agreement may not include operating expense provisions typically found in a retail lease, landlords must carefully consider their own costs as well as the proposed licensee’s needs in determining the license fee. Landlords should afford themselves a comfortable cushion when factoring maintenance, insurance, taxes and other costs into the license fee calculation. Conversely, pop-up licensees should request and review a detailed breakdown of the property’s operating expenses to assist them in negotiating the license fee and other payments.
Responsibilities of the Licensees
Many pop-ups do not have time to perform a detailed property inspection and may have to accept a space “as-is.” However, licensees should demand that the landlord deliver the space in good condition and free of any violations that could negatively affect the licensee. Licensees can request that landlords represent in the agreement that the space complies with all applicable municipal and zoning codes, and they should review the property’s certificate of occupancy, if available. Landlords should approach such representations with caution since a licensee’s intended use may raise questions of compliance with local zoning.
Even though it may not have the resources of a long-term tenant, a pop-up business should perform as much due diligence on a property and the owner as possible. Licensees should beware of red flags, such as a property or owner with a long history of municipal violations, litigation or complaints from neighbors. Conversely, a pop-up operation is not necessarily as invested in a property as a long-term tenant. Therefore, landlords should demand liberal access to the space to monitor for damage, environmental hazards and other violations.
Temporary retail and other pop-ups have grown into a multibillion-dollar industry that continues to evolve. Before pursuing such activations, both developers and pop-up operators should understand and obtain any necessary governmental approvals and carefully draft their lease or license agreement to ensure their interests are properly protected.