All the Right Moves: Negotiating Relocation Clauses

July 2014

When landlords sign leases with tenants that take up a relatively small amount of space in an office building or a shopping center, landlords try to give themselves the right to move these small tenants to other available spaces in the building or center in favor of future bigger or better tenants. In retail, landlords also desire additional flexibility to relocate tenants in the event they decide to redevelop a certain area in the shopping center. When these opportunities arise, the last thing a landlord wants is for a small tenant to hold the landlord hostage by demanding a king’s ransom over the larger tenant’s deal or the redevelopment, or worse, by not agreeing to relocate at all. To avoid these risks, landlords insert relocation clauses in their leases.

As a starting point, landlords may try to insert language that will allow them to relocate the tenant at any time and for any reason. Some might go even further and provide that if the landlord does not have alternative space available, then the landlord can terminate the lease. Most sophisticated tenants will balk at these types of clauses. If tenants have sufficient leverage, they will often successfully negotiate the removal of these types of clauses outright; however, most smaller tenants lack such leverage and need to instead focus on negotiating appropriate protections.

One of the first issues that comes up is notice. Tenants want the landlord to provide them with as much time as possible so that they can prepare to move. Moving is very disruptive to a business, and the more time the tenant has to prepare, the better. The range of relocation notices can fall anywhere from 30 days to one year, depending on the specific deal.

Another consideration is the location of the new premises. In an office setting, especially in a high rise building, some tenants want to avoid dropping down from higher levels that provide better views and that are perhaps more prestigious. At a minimum, tenants that care about these issues will try to stay within the same elevator bank of the office building, or at least close to it. In a retail setting, location is much more critical to the potential success of the business. Retailers make careful calculations before choosing a specific location in a shopping center based on many factors including visibility and tenant mix. Consequently, a retail tenant that agrees to be relocated will want to have the landlord agree to relocate it to a specific pre-approved relocation zone that contains comparable locations that meet the tenant’s specific requirements. For example, a tenant that agreed to lease space next to Nordstrom will typically not want to be relocated next to a mom-n-pop candy store.

One tenant demand that is usually not controversial when negotiating these provisions is the condition of the new premises. Tenants want to make sure that the landlord will build out the new space to match the condition of the original space, with all of the improvements that were installed in the original premises. After all, the tenant should not be required to come out of pocket for construction costs or moving costs when it is relocating to accommodate the landlord. Additionally, tenants will want the landlord to ensure that the new premises will be of the same or very similar size and dimensions. And if the space is bigger, then some tenants request that the rent will not increase.

As far as timing is concerned, depending on the office tenant, there might be a “busy” season (e.g., tax time for an accounting firm) or a busy time of the month that the tenant will not want to move. Retailers prefer (and in some cases insist) not to move during the holiday season period. It is one thing to disrupt the business during normal times of the year, but it is too much of a burden to move during the busy season when sales are at their highest. Aside from when to move, tenants try to protect themselves from being forced to move more than once. Some landlords will agree to limit their right to relocate the tenant to once every five years, or once during the original term and once during any option term.

Finally, if the new space is not suitable because it does not meet the various requirements set forth in the lease, the tenant might request the right to terminate the lease.  Some landlords argue that this right to terminate, to the extent that it is given, should be made reciprocal. Regardless, if there is a termination, tenants often request the right to recover their unamortized construction costs.

The right to relocate a tenant can be very important to a landlord and very burdensome to the tenant, but with some negotiation the parties can end up with a provision that protects both of their interests.