Lease or Licence? What’s the Best Option for Your Pop-Up Store?
Pop-up stores have become a popular way for online businesses to connect with customers, test products, create urgency, and enhance brand visibility. While pop-ups carry less risk than traditional retail spaces, business owners must still consider a variety of factors when establishing a temporary store. This article explores the key advantages and disadvantages of entering into either a short-term lease or a licence agreement to formalise the tenancy of your pop-up store.
Short-Term Lease: Key Considerations
When opening a pop-up store, a short-term lease typically involves a commitment of 6–12 months, documented through a Lease Agreement. In Victoria, the Retail Leases Act (‘RLA’) does not apply to leases for a term of less than one year, unless the premises are occupied continuously for more than a year. Although this type of lease is less formal than a traditional retail lease, it’s crucial to outline key details, including:
- The exact premises being leased;
- Rent amount, payment terms, and due dates;
- Lease term and permitted operating hours;
- Use of the space, including allowable alterations;
- Responsibility for utilities, amenities, and bills;
- Dispute resolution procedures and liabilities; and
- Contract termination processes.
Benefits of a Short-Term Lease
A short-term lease offers several benefits, including:
1. Exclusivity
Under the High Court decision in Radiach v Smith, the defining feature of a lease, as opposed to a licence, is exclusive possession. This means the lessee has the right to control the leased property, including excluding others from the premises. For pop-up store operators, this exclusivity allows for greater creative freedom and control over the store layout, providing valuable insight into managing a traditional storefront.
2. Property Rights and Protections
In contrast to a licence, a short-term lease provides the lessee with a property interest in the land, which can be enforced against third parties, including the lessor. This added layer of security makes it an attractive option for businesses investing significant capital into their pop-up. Additionally, depending on the lease terms, lessees may have the option to sublet the premises if you only plan to operate for a limited time.
3. Long-Term Flexibility
Although pop-up stores are typically short-term, a lease offers the possibility to extend the lease term if your business proves successful. Traditionally, business owners seek long-term security and landlords prefer stable tenants, so adding further options after an initial 6-12 month lease can benefit both parties. Keep in mind that extending the lease beyond 12 months may involve the operation of the RLA, so it’s important to consult with legal experts to ensure compliance. The key advantages of having a Retail Lease over a Commercial or Short-Term Lease include:
- Disclosure Requirements: If the landlord fails to provide a disclosure statement prior to entering a lease, the tenant has the right to withhold payment of outgoings and/or terminate the lease;
- Additional Tenant Protections: Retail lease tenants benefit from stronger protections against unconscionable conduct and misleading or deceptive behaviour by Landlords; and
- Exemptions from Certain Costs: Retail lease tenants are not responsible for paying land tax, capital costs, or the landlord's expenses related to preparing lease documentation.
Licence to Occupy: Key Considerations
Similarly to a lease, a licence to occupy requires a formal agreement outlining key terms, such as:
- The licensed area, noting that boundaries may be flexible and subject to change with consent;
- The term of the licence, including permitted operating hours; and
- The fee for the licence.
Benefits of a Licence to Occupy
A Licence to Occupy offers several advantages:
- Flexibility
Lease agreements come with significant financial and duration commitments. In contrast, licence agreements are ideal for smaller or newer businesses that wish to explore pop-up stores on a short-term, experimental basis. The terms of a licence agreement can be negotiated with fewer constraints, making it easier to adapt to specific business needs and goals. - Cost-Effectiveness
Due to its less formal nature and fewer property rights, entering into a licence agreement is typically more affordable than a short-term lease. The costs involved in preparing a licence agreement are also lower, as the agreement generally involves fewer rights and obligations between the parties. - Location Variety
Licence agreements provide greater flexibility when it comes to location. Pop-up stores can be set up in non-traditional spaces, such as shopping centre walkways. Operating in high-traffic venues can significantly increase foot traffic, enhance brand visibility, and potentially lead to higher sales. Although they do not obtain an exclusive proprietary right against third parties in these areas, licensees do have the right to control who enters their licenced premises so long as that reason is not discriminatory. For example, they can refuse entry to individuals or ask them to leave if that person is intoxicated, aggressive, or disruptive.
Conclusion: Which Option is Best for Your Business?
Deciding between a short-term lease and a licence agreement ultimately depends on your business’ specific needs. For some, the security, exclusivity, and control offered by a lease provide the ideal foundation for testing a long-term retail presence while cultivating customer relationships. For others, a licence agreement offers the opportunity to experiment with innovative marketing strategies, capitalize on trends, or test new products, all while keeping costs and obligations low.
DISCLAIMER: This article is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. No reader should act on the basis of any matter contained in this article without first obtaining specific professional advice.
We accept no responsibility for any action taken after reading this article. It is intended as a guide only and is not a substitute for the expert legal advice you can get from De Marco Lawyers and other relevant experts.
Sources:
Retail Leases Act 2003 (Vic) s 12(1)
Radiach v Smith (1959) 101 CLR 209
https://www.vic.gov.au/refusing-entry-licenced-premises/
https://legalvision.com.au/opening-a-pop-up-shop-what-do-i-need-to-know-about-finding-a-premises/
https://legalvision.com.au/once-you-pop-up-you-just-cant-stop/
https://sprintlaw.com.au/articles/set-up-a-pop-up-shop/
https://www.blueocean.law/blog/licences-to-occupy-a-viable-alternative-to-leases
https://legalvision.com.au/key-differences-between-a-retail-lease-and-a-commercial-lease/