A business acquaintance recently telephoned and asked if I had five minutes for a question. He had just received a letter from his landlord requesting a meeting to discuss the relocation of his business. Stunned, he pulled out his lease. Sure enough, buried there in the middle of the long lease agreement, he found a section stating that the landlord had the ability to unilaterally require the business to move to a new space in the building, even after years of tenancy. We spent a few minutes talking about that meeting and what a move might mean for his business.
So-called “Relocation Clauses” are commonly used by large commercial landlords. If your company is negotiating for space in a shopping center, a large office building, or even a light industrial complex, you may be faced with this type of provision. And that is particularly true if your company will be one of the smaller tenants in the complex.
A relocation clause gives a landlord the right to move your business to an alternate space within the building or complex. For example, you may currently rent 2,500 square feet of space in a shopping center, while next door there is 10,000 square feet of empty space that is available for rent. A prospective tenant approaches the landlord, but they conclude that at least 12,000 square feet of space is needed to accommodate their business. Of course, the landlord wants to rent the empty space because it will generate a lot of new revenue. If your lease contains a relocation clause, the landlord can opt to relocate your business to the other side of the shopping center, which would allow him to make the deal with the larger tenant.
Commercial landlords favor relocation clauses in smaller tenant leases because they want the flexibility to control and reconfigure their space, to accommodate the expansion needs of larger existing tenants, or to meet the demands of a potential major tenant who would agree to higher rents, along with bringing more prestige or increased foot traffic to the complex.
Although actual implementation of relocation clauses is not common, when a landlord does enforce the right it can be a very inconvenient experience for a small business. If the tenant has invested a lot of money to improve the space, or if it is a distinctive location that customers know well, a move could have a very negative financial impact. Therefore, when reviewing the terms and conditions of a new commercial lease with the potential landlord, be on the lookout for a relocation clause.
If you find such a provision in the lease, the first action should be to try and persuade the landlord to remove it entirely. If that approach is not successful, then try to negotiate some reasonable provisions that will diminish the operational and financial impact on your business, if someday the landlord does decide to enforce the clause. For example, it would be prudent to negotiate what specific events would trigger the relocation, such as only because of an expansion by an existing tenant. And, that a relocation cannot happen more than once during a tenancy and never during the final two years of the lease term. Some other specific items to negotiate include the following:
- The landlord will give as much prior notice as possible, no less than 90-120 days.
- The replacement premises must be the same quality or better as the existing premises.
- The square footage of the replacement premises must be equal or greater than the existing space, and contain the same characteristics, such as number of offices, number of exterior windows, or whatever unique features are important to the tenant business.
- The landlord will pay the cost for improvements or alterations to the new space to make it closely conform to the original premises.
- The landlord will pay for the reasonable costs of relocation.
The last two points, cost of alterations and the costs of relocation, are generally, but not always, included with relocation clauses. However, the landlord may have very different ideas than their tenant about what constitutes a relocation cost or what is considered “reasonable.” Therefore, it is advisable to have a clear understanding between the parties up front and included as part of the lease on this particular issue. Typically, the costs to make the space tenantable and the cost of a moving company are included. Yet, tenants should consider additional financial costs that may result, including but not limited to:
- specialty packing supplies
- computer equipment and server installation
- internet technology connection and telephone wiring services
- new letterhead, business cards and marketing collateral
- vendor or supplier services to relocate office equipment and fixtures
- website alterations
- updating and installing new signage
- disposal fees for obsolete equipment or inventory
- staff hours to unpack and reassemble the office or storefront
- new advertising campaign to inform the public of the new location
Lastly, loss of productivity during the potential days of down time and additional impact on revenue while customers re-orient themselves to a new location should also be calculated and discussed. Perhaps the landlord might be willing to reduce or even waive the rent for a month or two with good negotiation to offset some of these hidden costs.
It is easy to see that these relocation provisions result in a number of complexities, and that addressing these issues before the lease is signed is a much better option than facing the consequences of disregarding the potential burden of the relocation clause.
In fact, the relocation clause is just one of many important provisions in a commercial real estate lease. Only at the beginning of lease discussions do tenants have the most real power to negotiate with a landlord and control how they will be impacted. Given the wide array of potential impacts, we strongly recommend contacting an experienced attorney to advise on leasing issues. Feel free to contact me or visit our website for more information.