Power to the Pop-Ups

General Papers and Articles

Retail property has over the last few years been fighting a losing battle against the internet, with boarded-up high streets becoming a common sight across Britain.

This has even led some commentators to speculate whether there is any future at all for bricks and mortar in the retail world, beyond simply serving as distribution and “click and collect” hubs.

Running contrary to this picture of gloom however has been the rise of a more nimble and light footed form of physical retail space – pop-up shops – that might just help invigorate Britain’s high streets and give a boost to start-up businesses.

It’s not just shops either – pop-up businesses might also be bars, cafes, restaurants, art galleries, show-rooms, exhibition space, film locations – indeed just about any enterprise in either the commercial or not-for-profit sector that wants the flexibility of temporary occupation and does not want to get tied down by the burden of a long lease.

A pop-up business could be a seasonal operation, a one-off trade tied to a specific event (such as a sports tournament), or someone just testing the water.

Or it might be a small business, say an online venture, wanting to trial physical retail without long-term financial commitment, to raise their brand profile and carry out market research.

Whatever it is, a pop-up business will typically want to move into empty space quickly and for a short length of time.

The space might be a stand-alone shop, part of a building, space within a department store or market where there are other traders, or even a temporary structure.

Key things for property owners and pop-up businesses to think about are planning permission, the terms of occupation, statutory compliance, insurance, and business rates.

Planning

As far as planning is concerned, the pop-up world has benefitted from greater flexibility since the passing of secondary legislation in 2013 the form of the Town and Country Planning (General Permitted Development) (Amendment) (England) Order 2013.

Since 30 May 2013, buildings that are classed for use as retail (A1), financial and professional services (A2), restaurants and cafes (A3), drinking establishments (A4) hot food takeaways (A5), business (B1), non-residential institutions (D1) or assembly and leisure (D2) have been able to change temporarily to any use falling within A1, A2, A3 and B1 classes without obtaining planning consent for a single period of up to 2 years.

The 2 year period begins to run from the date the flexible use begins, and only properties which have a gross internal floor space of up to 150 square metres can take advantage of this change in the law. Premises between 150 and 500 square metres may also be able to benefit, but they must first have prior approval from the local authority to adopt a flexible use.

The local authority must be notified in advance of the temporary change of use, and it is not available for listed buildings.

After the 2 year period, the premises must revert to their original use.

For those enterprises whose initial testing of the water leads to a longer term business, there may even be opportunities to remain in the property after the initial two years if a deal can be worked out with the landlord.

If the temporary use has also been a success for the wider concerns of the region, for example by providing employment and smartening up the look of the high street, then there may be a good case to be made at the end of that two year period for a permanent change of use to be authorised.

For shorter term ventures, no planning permission is needed for any use of land or a moveable structure if the use does not continue for more than 28 days in any 12 month period.

Terms of occupation

The terms of occupation should be set out in a document for both parties to sign.

In order to embrace fully the pop-up philosophy, the agreement needs to be a lot more straightforward than a traditional commercial lease or, by the time you have finished dotting the i’s and crossing the t’s, the opportunity will have come and gone, defeating the object of the pop-up business in the first place.

Property owners themselves need to be able to respond quickly and innovatively if they are to take advantage of pop-up businesses wanting to start up in their area. If the property is owned by a large organisation, it will need to have appropriate decision-making procedures in place to enable prompt dealing, and so too will its advisors!

That being said however, landlords still need to tread carefully when deciding at the outset on the type of agreement to use. Pop-up businesses may be trendy, but old school landlord and tenant considerations still apply, and it will be counterproductive and potentially very costly to give away security of tenure inadvertently.

Any arrangement is likely to be documented by either a licence or (particularly for stand-alone premises) a lease, and if it is a lease then it will need to be excluded from the Landlord & Tenant Act 1954.

A licence – or concession agreement – may be appropriate where the pop-up business is taking space within a department store or market, or similar multi-trade environment, and the owner of the property wants to be able to move the licensees around from place to place within the property during the term of the licence.

However, great care is needed to ensure that the document is properly drafted as a licence, which requires more than simply labelling it a “licence”, and that the arrangement is not inadvertently allowed to run on for such a length of time that it takes effect as a lease with 1954 Act protection.

Where the pop-up business is going to occupy a single space that is not going to be moved around then for the property owner the safest course of action will be to use a lease which is properly excluded from the security of tenure provisions of the 1954 Act, and to ensure that at the end of the term the business is not allowed to remain at the premises without entering into another excluded lease.

Just because a lease is used however, that does not mean it has to be a long-winded, difficult-to-read document requiring lengthy negotiation. There are certain basic obligations that need to be covered, but they can effectively be covered succinctly and in plain English once the commercial terms have been agreed in principle.

Matters that will need to be set out in the lease include:

– Length of occupation or “term”. This should be fixed and not mention any statutory continuation. There will also need to be the standard wording regarding service of statutory notice and counter-notice to confirm the lease is excluded from the 1954 Act.

– Rent and any rent-free periods, the dates or days for payment, and how it is to be paid (for example by direct credit to the landlord’s bank). The rent might be a fixed amount or alternatively some or all of it might be linked to the pop-up’s turnover.

– Treatment of other outgoings. For the pop-up business, ideally it should try to negotiate an all-inclusive rent to avoid any nasty surprises; a deal that sets a fixed rent that includes other outgoings such as insurance, service charge and utilities, and perhaps even business rates too. If insurance and service charge have to be paid separately, the pop-up may want those payments to be capped.

– Whether VAT is payable. The property owner may have made a VAT election, however the pop-up might not yet have generated enough income to be VAT registered and if they are unable to recover VAT for this or any other reason they will need to take this into account when considering the affordability of the arrangement

– Basic fit out works. Even if the pop-up business only wants the premises for a very short period of time, it is likely to want to do some basic fitting out or adaptation to make them suitable. This should be agreed up front in a specification or drawing, which can be attached to the lease. The owner is unlikely to want to allow the occupier to make any other alterations, so they should be prohibited absolutely. The lease should also oblige the occupier to remove the fit out works at the end of the term and make good any damage caused, unless the owner says it can leave them there.

– Repair – this will usually be a basic requirement for the pop-up business to keep the premises clean and tidy and in no worse condition than they found them. The most effective way to document this is to attach a photographic schedule of condition to the lease. The pop-up won’t want to be responsible for carrying out any redecoration.

– Alienation – by its nature, this is going to be a personal arrangement with the pop-up business, and so it is unlikely that the lease will be assignable or permit any subletting.

– Rights to terminate – as well as a standard forfeiture clause, there may also be rights for the landlord to terminate the lease early on notice. It may want to be able to do so on quite short notice, for example if it finds a long term tenant. The tenant too may want the ability to terminate the lease early, especially if the business is a highly speculative venture.

– Statutory compliance and insurance – the lease will need to deal with these matters, as discussed below.

Statutory compliance

There are likely to be a number of statutory regulations to be complied with by a pop-up business and the licence or lease will need to include an obligation on the business to comply with them.

Depending on the nature of the business, the pop-up may have to comply with licensing laws, for example to authorise the sale of alcohol, hot food, or to allow entertainment. If alcohol is to be sold, then a premises licence will be required.

The pop-up business will also have to comply with health and safety law and, if applicable, food safety laws, as well as generally any planning restrictions and general statutory compliance.

Insurance

The property owner will already have buildings insurance and the licence or lease will either oblige the occupier to contribute towards the cost of this insurance, or it will be taken into account when assessing the licence fee or rent payable.

The pop-up business itself will also need to be insured before it opens for business.

Its insurance will need to cover things such as public liability, product liability, employer’s liability, trade contents, fixtures and stock, accidental damage and business interruption.

Although historically that kind of insurance was only available on an annual basis (with penalties for early cancellation or inflated premiums for shorter term policies), there are now tailor-made insurance policies for pop-ups providing comprehensive cover for as short a period as one month at competitive premiums.

Business Rates

There are potentially other benefits for property owners in entering into agreements with pop-up businesses. As well as saving on security and insurance costs, pop-ups can help reduce rates liability for empty premises as the pop-up business will be responsible for paying business rates during its occupancy.

Short periods of occupation by not for profit businesses can also help mitigate liability for business rates otherwise payable on empty properties.

The flip side of this is that for pop-ups, the expense of business rates can be a real impediment to starting up in physical space at all, as an alternative to running only an on-line operation.

A property owner might be willing to agree an all inclusive rental deal for insurance and service charge, but whether or not it is prepared to part subsidise the tenant for rates is another matter. In some circumstances it might be willing to do so in the hope that eventually the pop-up becomes a successful long term rent and rates-paying tenant.

There is currently an ongoing debate in the pop-up world over whether pop-up businesses should be exempt by local authorities from business rates or whether there should be an initial rates-free period to help them get up and running, and whether they should be collectively lobbying for such schemes.

It is controversial however, as of course rates discounts or rates free periods might result in unfair competition for other retailers, and many of those in the pop-up world themselves recognise this difficulty. In any case, having to pay rates from the outset arguably provides a truer test of a new business’s viability.

Some local authorities however have already set up rates discount schemes for small businesses starting up in their area to help ease the burden.

The future for pop-ups

There’s quite a buzz around pop-ups.

For the property owner wanting to take advantage of this new kind of business, there are agencies and websites they can use to help search for a pop-up business tenant.

The format offers opportunities to revitalise an area of town.

Alternative leasing structures can be developed, with intermediaries taking long leases of larger properties and developing them as market places, before entering into short term subleases or licences with a shifting population of pop-ups.

Box Park in Shoreditch is one example. It boasts of being the world’s first pop-up mall, which opened in 2011 for a period of four years. Constructed of stripped and refitted shipping containers, it has set out to create unique, low cost, low risk pop-up stores filled with a mix of fashion and lifestyle brands, galleries, cafés and restaurants.

As the recovery takes hold, and with Britain generally becoming more entrepreneurial, there is likely to be increased demand for this kind of short term occupancy, with young people in particular embracing the start-up culture.

By Jon Dickins, Consultant, Stepien Lake. First published in the Property Law Journal and reproduced with their kind permission.