In today’s business world, we continue to see creative interconnection among businesses. These arrangements are often motivated by a desire for companies to attain certain benefits of M&A transactions (such as synergies) without incurring certain costs (such as loss of autonomy and heightened transactional expenses). In the retail sector, a “shop-in-shop” business arrangement has become a common occurrence, where characteristically, a large retailer (herein referred to as a “licensor”) will license physical square footage in its retail store to another retailer (herein referred to as a “licensee”) to sell goods. These types of arrangements enable licensees to operate what would optically appear to be an independent store within a larger host, sharing the facilities and the consumer base of the larger host store.

A common example of a “shop-in-shop” is a cosmetic kiosk positioned on the floor of large department retailer. In 2009, The Wharton School authored an insightful article outlining the economic advantages of such business arrangements, which can be accessed here.

For a “shop-in-shop” business arrangement to take effect, the licensor and the licensee may enter into some type of license agreement that enumerates a license fee payable to the licensor, among other terms. The parties may also agree that title to inventory located on the licensor’s premises is retained by the licensee, while proceeds from the sale of the licensee’s inventory are collected by the licensor. These proceeds may be remitted by the licensor to the licensee, subject to certain terms.

Secured lenders and licensees engaged in a “shop-in-shop” business relationship should take note that the physical location the licensee’s collateral (such as inventory) remains relevant under the Personal Property Security Act (Ontario). This is primarily because a secured lender runs the risk of losing its security interest in collateral being sold or dealt with on the premises of a licensor.

Analysis related to perfecting a security interest should be dealt with on a case-by-case basis, although generally speaking, the following may be considered to advance the interests of a secured lender in a “shop-in-shop” context:

  1. Collateral access-type agreements: Secured lenders should consider whether any existing license agreement enables access to collateral in the event of default. Practically speaking, such agreement may be necessary to make such collateral located at a “shop-in-shop” eligible, despite the licensee retaining title.
  2. Assignment of a license agreement: An assignment of a license agreement may be necessary if the secured lender wishes to step into the shoes of a licensee in an event of default, to effectively continue to operate the licensee’s business. The conditions to assignment of a license agreement should be considered carefully by all parties.
  3. Security interest: A licensee operating a “shop-in-shop” may have an unsecured interest in any proceeds derived from the sale of its inventory that are held by the licensor (until these proceeds are remitted to the licensee). A licensee may wish to consider a segregated trust arrangement that would be recognized in law or obtaining a security interest in the proceeds, granted by the licensor. The advantages of a licensee obtaining a security interest against the licensor include, the licensor’s creditors being put on notice of the licensee’s claim to the proceeds and the licensee’s security interest will be in priority to any unsecured creditors of the licensor.

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