"Pop-Up" Leasing: Practical Considerations,

Key Provisions for Landlords and Tenants

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TUESDAY, FEBRUARY 5, 2019

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

Robin Fisher, Founder, Blace, New York

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

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Pop-Up Leasing: Negotiating & Structuring Short-Term Leases

Glenn D. Wright

Wright Law Firmglennwright@wrightlawfirmnyc.com

Robin Fisher

Blacerfisher@blace.co

5

What are Pop-ups?

Short term leases or license agreements (“tenants” will be used for both lessees and licensees)

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

May involve share space with other tenants

Vendor in a food hall

Could be temporary art installations

6

Advantages for Tenants

Opportunity to utilize novel/memorable space theyotherwise would not have access to because of the highrent. Landlords offer pop-up space at below-market rent inexchange for them having the right to quickly evict if theright tenant comes along. Licenses easier to negotiate thanleases-lower transaction costs.

Retailers can open their pop-ups close to large events suchas art fairs.

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

7

Advantages for Landlords

Landlords can wait longer for an ideal tenant, the market rate to rise or appeal for a zoning change

Temporary activations also increase foot traffic to the space, which is appealing to landlords as a revenue-generating alternative to open houses.

Temporary tenants can often offer infrastructure updates such as polishing concrete, installing lighting, additional bathrooms, etc. which they leave in place upon vacating the space.

8

Pop-Up as Trial Run

Does the tenant want the option to turn this lease into along term one if the store is successful? The pop-uptenant should attempt to negotiate that up front (not afterthe concept is a runaway success).

Does the landlord also own or manage nearby buildings?The retail tenant can request an option to move to anearby, less expensive space, (maybe on a side street)so as not to lose buzz and foot traffic they established inthat neighborhood.

Regardless of success or failure, the response to thebrand in a brick and mortar concept will guide tenants inmaking more informed decisions on a long term lease.

9

Examples of Pop-up Licenses

Pop-up retail licensees may not even have a

designated space. Upscale Department Stores have

designer retail pop-ups on their sales floors; food

halls have many vendors akin to a co-working space.

Big Box stores like Best Buy have salesmen from

many companies on the sales floor.

Given the rise of online shopping and the decline of

retail, stores are competing for customers and need

to present more of a vibrant marketplace model.

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Use Clause

Pop-ups can many times be very specific in their use

because term is a short period of time. Overall, retail

use clauses are becoming broader to accommodate

“customer experiences” in line with the vision or

branding of the tenant.

Despite advantages, landlords will not jeopardize a

long term tenant by violating their exclusives.

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.

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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?

Landlord’s notice to terminate

Competing retailers

12

Negotiating Rent

A new or online retailer starting a pop-up is an unknown

commodity. Neither landlord or tenant want to commit to

a long term lease. One solution is that they may

negotiate a rent to include a percentage of gross sales. If

the pop-up is primarily a showroom, the landlord could

also request a percentage of online sales during the time

that the pop-up is operating.

Even if based on sales, landlords generally prefer the

tenant estimate its rent based on a "gross up" of its

anticipated sales. The landlord will not want to chase a

pop-up for its percentage rent later.

13

Compliance with Laws

Landlord should make representations as to building

code compliance, certificate of occupancy. Tenants

build-out for pop-ups generally merely aesthetic.

Potential problem where pop-up tenant uses

repurposed space previously zoned for office or

manufacturing use and in creating a pop-up store

makes the space a place of public accommodation.

Who is responsible for ensuring the space is ADA

(American with Disabilities Act) compliant? This

should be in the lease.

14

Compliance with Laws (cont.)

Landlords should, as in any lease, ask for personal

guaranty from Tenant’s principal or parent company.

Tenants should plan well in advance especially if

pop-up has outdoor space, abuts or encroaches on

public land or if they will serve alcoholic beverages.

Tenant may need community board and municipality

approval.

Do due diligence on prior use of premises. If location

has a history of complaints from neighbors, tenant

may be inheriting a problem.

15

Responsibilities of Tenants and Landlords

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 co-working space,

vendors are licensees, not lessees, and the landlord is

responsible for signage and maintenance and repairs of

entire premises.

16

Options in Pop-up leases

Extension - if landlord still does not have long term

tenant and pop-up is profitable

Expansion - especially in marketplace or food hall

concepts, move to larger space

Early Termination – both landlord and tenant usually

want flexibility. No right for the pop-up tenant to

assign or sublet space, landlord would recapture.

17

Property Damage Provisions

Casualty Clause- In a pop-up or license, the tenant willwant the right to terminate the license in the event of afire or significant casualty rather than having to waitaround for landlord to rebuild.

Short term tenants may not care about the space asmuch as a tenant would. Landlords want liberal access topremises to ensure that pop-ups don’t cause anydamage or environmental hazards which would laternecessitate remediation. Landlord will ask for personalguarantees for lessees and licensees withindemnification clauses for property damage that survivethe end of the lease.

18

Relocation and Recapture Rights

Landlord’s right to recapture space or relocate tenant iscommon in license agreements. As these are short termleases and landlord bears the risk of the long termoverhead on the space, Landlord must maximize value aflexible portfolio of tenants.

If pop-up tenant licensee in a shopping mall ormarketplace spends a significant amount on anexperiential concept and is then relocated or evicted, thelicense could provide that landlord would reimburse thetenant for any unamortized portion of the build-out cost.Generally, the shorter the term, the less brand-specificthe build-out will be.

19

Leases v. Licenses

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

space that is revocable by the Landlord. Under 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.

20

Leases v. Licenses (cont.)

A lease gives a tenant possession and greater rights

than a licensee.

A lessor using self-help to evict a pop-up lessee is

taking a huge risk. The lease must contain precise

language regarding this. The landlord must still

litigate and therefore must justify its self-help to the

Judge presiding over the case. Section 853 of NY

Real Property Actions and Proceedings Laws states

that Landlords can face treble damages if a Tenant

succeeds in proving that the eviction was unlawful.

21

Attorneys drafting tenancy agreements for pop-ups haveto keep in mind whether the document will interpreted bya Court to be a lease or license. Courts in New York lookbeyond the title of a document to define it. Even if anagreement is referred to as a lease throughout, if it hasthe qualities of a license, it will be treated as a license.Courts seem to rule that a document is:

(i) a lease if it is for exclusive use for a set period and

(ii) a license if it for a non-exclusive use which isterminable at will.

22

In American Jewish Theatre Inc. v. Roundabout Theatre, Inc. 203 AD2d 155 (NY App. Div. 1st Dept. 1994) the Court stated that “whatdefines the relationship is not its characterization of technicallanguage used in the instrument but rather the manifest intention” ofthe parties. The Appellate Court wrote 'The nature of the transfer ofabsolute control and possession is what differentiates a lease from alicense or any other arrangement dealing with property rights whereasa license connotes use or occupancy of the grantor's premises, alease grants exclusive possession of designated space to a tenantsubject to rights specifically reserved by the lessor. The former iscancellable at will without cause."

Although the document was called a license, the tenant had a sixmonth fixed right to use the space that was not revocable at will, thecourt held that the relationship was a leasehold.

23

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.

24

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.

25

In the case 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.The tenancy document was entitled "License"; had a 15-yearterm and a payment structure including a percentage of salesthat resembled a lease. Also in the agreement, the City retainedthe right to terminate the relationship at will on twenty-five (25)day written notice as long as its reasons were not arbitrary orcapricious.

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.

26

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 RPAPL 713(7) 10-day notice to quit. Plaintiff

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

occupying the space as 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.

27

The Supreme Court of New York, Appellate Term, Second

Department in the matter of JCF Assoc., LLC v. Sign Up

USA, Inc. 59 Misc. 3d 135(A)(2018) indicated that it was

disregarding labels and terminology in the agreement. This

case related to a billboard. It is standard practice to refer to

billboard agreements as “leases”, the parties as “Lessor" and

"Lessee" and money paid as "rent."

The landlord had filed a holdover proceeding to evict. His

case was dismissed, and he appealed. The Appellate Court

affirmed the lower Court’s ruling that the agreement was a

license, not a lease, and the parties had not established a

landlord-tenant relationship.

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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 contract was a license and not a lease and

therefore, there were no grounds for an injunction. This was

despite explicit language defining it as a lease.

29

Aside on Co-Working Space

It’s hard to focus on temporary space without discussing co-working and flex office.

Providers of this space (i.e. WeWork) have saturated the market and account for nearly 3% of inventory.

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.

30

Aside on 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

31

Co-Working Agreements

Some unique features of co-working agreements are:

Strong self-help rights for Landlord

Strong rent abatement rights for service interruptions

Flexibility in amount of tenant’s usage

Member experience is important-akin to hospitality businesses

Flexible access systems to keep buildings safe while allowing for monthly turnover

32

Types of Space for Temporary Activations

Commercial

Retail

Industrial

Office

Venue

Residential

Townhomes

Loft Spaces

33

RETAIL

RETAIL

INDUSTRIAL

VENUE

RESIDENTIAL

RESIDENTIAL

40