Location, Location and Location (But Relocation?)

The tenant will then address the type of substitute space it is to receive and specify with some particularity the attributes it must have, such as comparable size and location. Aspects of the location of the space might include proximity to an anchor store or even to a specific anchor store; the mall level on which the new space is to be located; a requirement that it not be near an exterior entrance into the mall; and other similar requirements, depending upon the characteristics of the particular mall. For example, a food tenant may or may not wish to specify that it be relocated within a food court in a particular mall. Some tenants are able to require the landlord to offer several separate spaces from which they can choose. Others have been able to avoid an increase in rent in the case where the relocation space proposed by the landlord is somewhat larger than the original space.

As one might expect, the allocation of relocation costs between the parties is usually heavily negotiated. The main categories of costs are those attendant to building out and fixturing the substitute space and the actual costs of moving equipment, fixtures and inventory from the original space. Thus, one of the major issues is whether the landlord is to pay for building out and fixturing a brand new store or whether, as is sometimes the case, the tenant is to bear the cost of building out the new space, receiving only a partial reimbursement from the landlord in an amount equal to the unamortized value of the tenant's leasehold improvements in the original space. That negotiation is all about leverage ' a major specialty retailer has been successful in having its landlord build out the new space to the standards of its current prototype at the landlord's sole cost. Depending upon how it turns out, this negotiation often gives rise to a requirement by the tenant that its lease term start anew upon its relocation so as to fully realize upon the new store. Other costs include loss of business during any period when the tenant is unable to operate because the substitute space is in the process of being built out and during any 'down time' resulting from the move itself. In at least one lease negotiated by a much sought after national tenant, lost profits are addressed, with the landlords being responsible for lost profits during any 'down' periods based upon the tenant's profits for the same period in the prior calendar year.

Moreover, what if the landlord and the tenant are simply unable to agree on substitute space? Lease provisions addressing that situation are as varied as the imaginations of the parties. They range from, on the one hand, requiring the tenant to accept the space offered provided it is of similar size, with no right to terminate the lease, to, on the other hand, giving the tenant the right to terminate the lease if the substitute space is not acceptable to it in its sole and absolute discretion, in which event the landlord pays the tenant the unamortized value of its leasehold improvements and fixtures.

Some leases contain a form of 'Chicken.' Depending upon how the relocation provision is fashioned, the lease either gives the landlord the right to withdraw the requirement that the tenant relocate where the tenant has a right to terminate the lease and is indicating that it might well do so; or it gives the tenant the right to reconsider and accept the substitute space once the tenant receives a notice of lease termination from its landlord.

Do relocation provisions ever go the other way for the benefit of the tenant? Consider the day spa tenant that has carefully selected its space by the mall entrance to that high-end department store whose clientele are the tenant's very own. Need not that tenant be protected against a relocation of that anchor store? Some leases do provide that if the department store is relocated, the day spa will also be relocated by the landlord, entirely at the landlord's expense, to a location similarly proximate to the relocated department store.

It can be seen from the foregoing that landlords and tenants, not to mention their respective counsel, have given a good deal of thought to these issues. Because of the importance of location to the retail tenant and the importance to mall and shopping center owners of being able to add anchor stores and otherwise expand their properties, it is important that landlords and tenants, and their respective counsel, continue to exercise creativity in fashioning relocation provisions which meet the legitimate needs of the parties.

Myles Hannan is a partner in Linowes and Blocher LLP located in the Washington, D.C. suburb of Bethesda, Maryland.

Given the age-old maxim of retailers that what matters is 'Location, Location and Location,' it is often difficult for an in-line retail tenant to confront the fact that its landlord can require it to relocate its store to other space in a mall or shopping center. On the other hand, owners of malls and shopping centers must retain the right to expand, to add new anchors and to remerchandise their properties from time to time ' thus, the 'Relocation' provision found in virtually all forms of in-line retail leases. This article explores the major issues that a relocation provision creates for a retail tenant and how some of those issues might be addressed in the lease.

It will serve to sharpen our focus to look first at a relocation provision taken from the form of lease used by the owner of a large regional mall, which is not an atypical provision. It states in pertinent part:

Landlord has the absolute right in its sole and unfettered discretion to relocate Tenant to another space in the Shopping Center. Landlord shall provide Tenant with not less than sixty (60) days written notice (the 'Relocation Period') of relocation specifying a date (the 'Relocation Date') upon which the relocation is to take place. During the Relocation Period, Landlord shall offer Tenant such alternative locations as may be available. In the event the parties agree on a specific location (the 'Relocation Premises'), then this Lease shall be amended to reflect the new location, square footage and rent. In the event Landlord and Tenant are unable to agree on the Relocation Premises during the Relocation Period, this Lease shall automatically terminate on the Relocation Date.

The clause goes on to provide that, if there is agreement as to the relocation space, rent will abate during a 60-day build-out period for the new space and the landlord will pay tenant the unamortized value of its improvements to the original premises. All very straightforward and to the point, is it not? Not exactly. Presented with such a provision, the retailer's concerns are myriad. For example:

• Will I have the same proximity to an anchor store as I now do?
• Will the traffic flows be as good as I now enjoy?
• Will the relocation space be large enough for my optimum merchandising layout?
• What will be the cost to me of the relocation and how will it affect the timing of my projected cash flows?
• Is my remaining term long enough to fully amortize the new furnishings, fixtures and equipment that the move will necessitate?
• What if the 'down time' during the move is longer than expected and adversely affects my store's profitability?
• What happens if I cannot see my way clear to relocate, and what are the financial consequences if I just refuse to do so?

So, what is a tenant to do?

The first thing a tenant will wish to do is to narrow the landlord's right of relocation to certain specified events, such as the addition of an anchor store or the expansion of the mall or shopping center floor area by more than a specified percentage. Moreover, the specified event must occur in fairly close proximity to the tenant so as to make relocation a necessity and not a whim. The tenant will also attempt to restrict the landlord from requiring relocation during the period of October through December, so as to avoid disruption during the holiday season and will seek to limit the number of relocations during the lease term, ideally to one. Some tenants are also able to bar exercise of the right of relocation during the first few lease years of their term and permit relocation only with their consent during the last year of the lease term.

The tenant will then address the type of substitute space it is to receive and specify with some particularity the attributes it must have, such as comparable size and location. Aspects of the location of the space might include proximity to an anchor store or even to a specific anchor store; the mall level on which the new space is to be located; a requirement that it not be near an exterior entrance into the mall; and other similar requirements, depending upon the characteristics of the particular mall. For example, a food tenant may or may not wish to specify that it be relocated within a food court in a particular mall. Some tenants are able to require the landlord to offer several separate spaces from which they can choose. Others have been able to avoid an increase in rent in the case where the relocation space proposed by the landlord is somewhat larger than the original space.

As one might expect, the allocation of relocation costs between the parties is usually heavily negotiated. The main categories of costs are those attendant to building out and fixturing the substitute space and the actual costs of moving equipment, fixtures and inventory from the original space. Thus, one of the major issues is whether the landlord is to pay for building out and fixturing a brand new store or whether, as is sometimes the case, the tenant is to bear the cost of building out the new space, receiving only a partial reimbursement from the landlord in an amount equal to the unamortized value of the tenant's leasehold improvements in the original space. That negotiation is all about leverage ' a major specialty retailer has been successful in having its landlord build out the new space to the standards of its current prototype at the landlord's sole cost. Depending upon how it turns out, this negotiation often gives rise to a requirement by the tenant that its lease term start anew upon its relocation so as to fully realize upon the new store. Other costs include loss of business during any period when the tenant is unable to operate because the substitute space is in the process of being built out and during any 'down time' resulting from the move itself. In at least one lease negotiated by a much sought after national tenant, lost profits are addressed, with the landlords being responsible for lost profits during any 'down' periods based upon the tenant's profits for the same period in the prior calendar year.

Moreover, what if the landlord and the tenant are simply unable to agree on substitute space? Lease provisions addressing that situation are as varied as the imaginations of the parties. They range from, on the one hand, requiring the tenant to accept the space offered provided it is of similar size, with no right to terminate the lease, to, on the other hand, giving the tenant the right to terminate the lease if the substitute space is not acceptable to it in its sole and absolute discretion, in which event the landlord pays the tenant the unamortized value of its leasehold improvements and fixtures.

Some leases contain a form of 'Chicken.' Depending upon how the relocation provision is fashioned, the lease either gives the landlord the right to withdraw the requirement that the tenant relocate where the tenant has a right to terminate the lease and is indicating that it might well do so; or it gives the tenant the right to reconsider and accept the substitute space once the tenant receives a notice of lease termination from its landlord.

Do relocation provisions ever go the other way for the benefit of the tenant? Consider the day spa tenant that has carefully selected its space by the mall entrance to that high-end department store whose clientele are the tenant's very own. Need not that tenant be protected against a relocation of that anchor store? Some leases do provide that if the department store is relocated, the day spa will also be relocated by the landlord, entirely at the landlord's expense, to a location similarly proximate to the relocated department store.

It can be seen from the foregoing that landlords and tenants, not to mention their respective counsel, have given a good deal of thought to these issues. Because of the importance of location to the retail tenant and the importance to mall and shopping center owners of being able to add anchor stores and otherwise expand their properties, it is important that landlords and tenants, and their respective counsel, continue to exercise creativity in fashioning relocation provisions which meet the legitimate needs of the parties.

Myles Hannan is a partner in Linowes and Blocher LLP located in the Washington, D.C. suburb of Bethesda, Maryland.