14 November 2013
Pop-up leases - what to look out for
Pop-up leases are short-term leases that provide landlords with tenants for premises that would otherwise be empty, and tenants the opportunity to test out sales or other benefits of trading from a particular location without committing to a lengthy lease.
Pop-up leases are being granted to a wide range of businesses, from small traders in the High Street to a Cath Kidston outlet at Terminal 5 at Heathrow, but are particularly being used by restaurants, bars and salons.
Check whether the pop-up activity requires a planning application because it involves a change of use of the premises. However, new laws on 30 May 2013, designed to encourage pop-up leases, have relaxed the change of use rules. They allow changes of use, without the costly and lengthy planning applications that would otherwise be required, from any small Class A1 shops, A2 financial and professional services, A3 restaurants and cafes, A4 drinking establishments, A5 hot food takeaways, B1 businesses, D1 non-residential institutions and D2 assembly and leisure, to flexible use which is within any of either Class A1 shops, A2 financial and business services, Class A3 restaurants and cafes and B1 businesses.
There is also a general exemption allowing flexible use for buildings over 150 square metres without requiring planning applications.
The rules are in force for two years only, and buildings will revert to their previous uses at the end of the two-year period. Any business wanting to continue the new use will have to apply for planning permission to change use as if the new rules had never been in force.
Nor is planning permission needed if the use is for not more than 28 days in any 12 month period. Many pop-up businesses stay open for only 28 days, in order to take advantage of this.
There may be other restrictions on use of the premises. If the landlord's interest is also leasehold, check the head lease. If the landlord is a freeholder, there may be covenants restricting certain activities on the premises.
If the premises include common parts – for example, in a shopping centre – the leases of other tenants in the development should also be checked, as they may effectively stop the landlord from granting pop-up leases.
The landlord will also need to check whether rent paid can be kept, or has to be treated as a service charge and paid into the appropriate fund.
There may be health and safety issues associated with the intended use.
Rent and costs
Tenants will not expect high costs or obligations under pop-up leases, and often seek lower or concessionary rents.
Tenants will usually want to fit the premises out quickly, and the lease should ensure they can – often there will be little or no structural or external changes. Repair and maintenance obligations can be minimal, with few obligations at the end of the tenancy, and service charges will have to be negotiated.
A pop-up tenancy will end a landlord's empty property rates relief, so liability for rates must be determined.
A number of pop-up tenants end up asking to enter into a conventional, longer-term lease at the end of their pop-up tenancies – and landlords will be better equipped to judge whether they are likely to be good longer-term tenants because they have seen the tenant's trading record during the pop-up tenancy.
However, landlords generally assume the worst, and the leases they offer will allow them to recover possession of the premises quickly if a more attractive, longer-term tenant turns up. The provisions of landlord and tenant law that otherwise give tenants security of tenure will, therefore, usually be excluded.
From the tenant's perspective, the length of the term will be critical and, in some instances, whether there are break clauses allowing them to get out of the lease – some pop-ups are merely to create PR for a large brand, to capitalise on a fad or craze, or to test out a particular product or concept, and the tenant will want to move on as soon as their objective is accomplished.
Tenants may require a licence – for example, if they intend to sell hot food or alcohol, or offer any form of regulated entertainment, between 11am and 5pm.