What are the main considerations in making the move to more permanent space?
What are the limits of the pop up model for retailers – and what are the advantages?
The pop up model has proved popular for both retailers as well as for landlords looking for uses for empty shops and to generate additional income from space that has not previously been rented out. Taking this sort of short term space can be great for your business as a retailer, allowing flexibility to test a new brand or product, without the long term financial commitments usually associated with a traditional lease of fixed premises and will usually have certainty of what the overheads will be.
You are likely to have been offered some sort of short term licence arrangement in taking your pop up space, as the landlord will want to ensure you do not have any long term security. As such if the pop up is a success, even if you think you have found the perfect location for your new product or brand as a launch or test site, you are unlikely to have any right to occupy after the original period.
This lack of security is something to weigh up against a pop up’s flexibility. The success of the pop up itself may also strengthen the landlord’s hand to set a high rent or licence fee if you wanted to stay longer than the original period agreed.
On the other hand if the pop up has not been a success or for whatever reason you do not wish to remain beyond the original term agreed, the pop up will have served its purpose and you are free to move out and move on, dealing only with whatever limited liabilities have been agreed in the terms of the pop up agreement entered into.
What are the issues for retailers looking to move from the pop up model to more permanent space?
A key consideration for a retailer moving to fixed premises will be who takes on the lease. If start ups and sole traders, will this be in his or her personal name or is it time to incorporate the business so that the limited company is the tenant.
However if taking the lease as a brand new company with no trading history, a landlord may still require either a personal guarantee or a substantial rent deposit, as the business is effectively an unknown entity. Giving such a guarantee - and with it the potentially substantial personal liabilities under leases if the business does not succeed - should be considered very carefully at the outset.
Funding any rent deposit called for and the terms of its release back if the business is successful need to be given careful thought.
Planning issues also need to be considered if not addressed previously at the pop up stage. The landlord may not give you any assurances that the site has the right planning consent for your purposes. This is something you will need to make your own enquiries on to ensure you do not commit to a lease but cannot trade there, without the risk of enforcement action from the local planners.
While committing to a lease, you may also want to build in some flexibility over its terms and may want to be able to exit the premises before the end of the lease. The terms of the lease could include a break clause for an early exit and should also allow for assignment or subletting, whether you have outgrown the space early or if the business has not been a success.
However the location of your store may well be critical to its success. Unless you take a business lease that is protected under the Landlord & Tenant Act 1954 you will not have any right to remain in the premises at the end of the lease. Negotiating a lease with this protection will give the business security in its location longer term and the right to ask for a new lease at the end. It may also be a more attractive lease to assign on, in the event you no longer need the space.
Can your business grow without taking this step?
This will be something only the individual retailer can assess but any successful business will need some certainty around its future to allow for investment and planning. This is no more evident than in identifying where the business is to operate from. If the pop up is to become permanent, substantial costs may need to be invested in a shop fit out and branding, to continue to build on initial interest and attract customers. A well negotiated lease could give you a rent-free period while these works take place, depending on the strength of the landlord’s hand. You will need landlord’s consent for these works and possibly planning permission. You should negotiate carefully any terms about reinstating the alterations at the end of the lease when you hand the premises back.
If balancing the funding of the product or brand’s growth against the cost of getting proper legal and surveying input on any lease taken, remember an otherwise successful business may fail if brought down by onerous lease terms and substantial liabilities not properly considered at the outset.
Questions to ask:
- Potential liabilities of a lease
- Is a guarantee or rent deposit required? How long will this last – and who will give it?
- When and how is the rent going to be reviewed?
- Can you exit early or assign the lease without continuing liability?
- Will you have to reinstate your alterations when you vacate?
- Will you have the right to a new lease at the end of the term?
If you have any queries or would like further information on moving from a pop up to a lease, please contact Helen Wheddon, Partner and Head of Real Estate Disputes
First published in The Retailer, October 2016