In the Spotlight: Tenant Issues in Relocation Clauses

Virtually every office landlord includes a relocation clause in its form lease, primarily to provide the landlord with flexibility to expand larger tenants into adjacent space or connecting floors, or to avoid creating unleaseable areas between two tenants. While these are reasonable concerns for the landlord, possible relocation raises significant issues and concerns for the tenant as well. This calls for careful consultation with the tenant's attorney and tight drafting to lessen the cost and inconvenience to the relocated tenant, should the landlord exercise its rights to do so.

Timing

A tenant should negotiate for a long lead time to prepare for the relocation. While a landlord may offer 30 or 60 days, a tenant should insist on at least 90 days' notice before having to move. This gives the tenant time to arrange for necessary cable, telephone and satellite hookups, and time to notify customers and clients of the move. On the flipside of this issue, the request to substitute premises should not be allowed at all during the last 18 months or so of the lease term. The rationale is that there is only a short time remaining in the lease, and it would be extremely unfair and inconvenient to force the tenant to move and operate in the new location for a little over a year and then possibly have to move again. Most landlords will not resist this position, as they will not want to incur the expense of the move or the tenant improvement costs. The relocation should also not be allowed unless the landlord intends to use the tenant's space for a full-floor tenant, or for a tenant that will occupy at least 50% more space than the original tenant is occupying.

Nature of Substituted Premises

It goes without saying that the replacement space must be equal to or greater than the original space in every manner. Often, a relocation provision will use the word “comparable,” but this could arguably be “close to, but not quite as good” as the original space, and the tenant should not have to occupy anything less than exactly what they had before. As stated above, since most office space is fungible, the tenant need only make sure that: 1) the square footage is at least equal in size to the prior space, with the same number of interior offices, windows, bathrooms, and other amenities (such as a kitchen area, number of conference rooms, etc.); 2) the location is at least as desirable (as reasonably determined by the tenant ' i.e., a second-floor space with windows facing the street in a high-rise building is not as desirable as a top-floor space with a lake or ocean view); 3) the tenant finish is of equal or greater quality (if the tenant had previously installed gold faucets, it should not settle for building-standard faucets). The tenant should have the ability to approve any and all plans and specifications.

Landlord's Payment Obligations

Typically, a landlord will offer to pay the cost of moving a tenant's fixtures, furnishings and furniture. The tenant should expand this to include any equipment and should not be required to move until all systems are operational, including all telephone systems, computer and telecommunication equipment and cabling. The landlord should pay for new stationery identifying the substitute space, as well as the cost of mailings to advise the tenant's customers, vendors, insurance companies, etc., of the move. Until the tenant can walk into the new space and immediately begin operating there, the tenant should not be required to abandon the original space. The landlord should be required to use reasonable or best efforts to meet the time frame the parties agree should be used for the relocation to occur, as the tenant will have advised many third parties (movers, customers, service providers) when the move will take place and again, it would be disruptive to reschedule or notify these parties the date is incorrect.

No Additional Cost to Tenant

Unless the tenant has asked for a larger space than the original premises, or has requested that the tenant finish greater than what previously existed, the tenant should not bear any cost whatsoever when the move takes place. If the substitute premises happens to be larger (remember, it should never be smaller unless the tenant has requested it and receives a reduced rent), the tenant should not be required to pay any more rent for the larger space. Rent should stay at the same dollar amount (and not recomputed on a square-foot basis) as existed at the original space, and the tenant should not be required to pay an additional proportionate share of expenses (taxes and operating costs) for having more space.

Right to Terminate

Finally, if the landlord complies with all of the above requirements, there still may be instances where the tenant is just dissatisfied with the substituted space. In those situations, the tenant should have a small window of time simply to terminate the lease unless the landlord rescinds the relocation. If the tenant exercises this termination right, it should be given a reasonable period of time to find suitable replacement space.

Additional Considerations for the Retail Tenant

While a smooth uninterrupted transaction is always a tenant concern, the retail tenant is even more concerned about preventing any interruption of its operations, lest it causes the tenant to lose customers even temporarily. If a customer cannot locate the store, or does not want to exert any effort to find the new location and can shop at an alternative store, a temporary loss can become permanent. Therefore, the tenant should not allow any relocation during particularly peak seasons such as the holiday months of November and December, or back-to-school time in August and September, when most sales occur and people are often more hurried or will quickly find alternatives to save time or money. It is likely that there are certain heavier traffic areas in a shopping center, and, therefore, the tenant must only allow a relocation to areas with equal traffic or which are even busier than the one in which the tenant is presently located. Is the new location near a main entrance or a dead-end area? Is the new location similarly adjacent to an anchor tenant or the food court (which is a more desirable area)? Are there similarly merchandised stores for which the tenant is presently clustered? For example, if the tenant in question operates a women's accessory store and is currently located adjacent or very near four women's apparel stores, then moving the tenant to a distant location (even if a heavy traffic area) which is surrounded by men's or toy stores only, could adversely affect sales going forward.

Conclusion

Every tenant's circumstance is different. Even though a landlord may view all its office space as fungible, your tenant client may not agree, and should consider the above precautions before agreeing to a relocation of its space. Retail tenants must also consider the season and the tenant mix at the new location, and have veto rights in certain circumstances.

The three most important issues in relocation (only one of which is location):

• Where?
• When?
• Cost?

Answers to these questions will determine the extent to which a tenant will willingly go along with its landlord's offer, or negotiate vehemently for alternative solutions.

Ira Fierstein, a member of this newsletter's Board of Editors, is a partner in the Chicago office of Seyfarth & Shaw, LLP. He has more than 30 years of experience counseling national developers, shopping center owners, limited liability companies, partnerships and other clients.

Virtually every office landlord includes a relocation clause in its form lease, primarily to provide the landlord with flexibility to expand larger tenants into adjacent space or connecting floors, or to avoid creating unleaseable areas between two tenants. While these are reasonable concerns for the landlord, possible relocation raises significant issues and concerns for the tenant as well. This calls for careful consultation with the tenant's attorney and tight drafting to lessen the cost and inconvenience to the relocated tenant, should the landlord exercise its rights to do so.

Timing

A tenant should negotiate for a long lead time to prepare for the relocation. While a landlord may offer 30 or 60 days, a tenant should insist on at least 90 days' notice before having to move. This gives the tenant time to arrange for necessary cable, telephone and satellite hookups, and time to notify customers and clients of the move. On the flipside of this issue, the request to substitute premises should not be allowed at all during the last 18 months or so of the lease term. The rationale is that there is only a short time remaining in the lease, and it would be extremely unfair and inconvenient to force the tenant to move and operate in the new location for a little over a year and then possibly have to move again. Most landlords will not resist this position, as they will not want to incur the expense of the move or the tenant improvement costs. The relocation should also not be allowed unless the landlord intends to use the tenant's space for a full-floor tenant, or for a tenant that will occupy at least 50% more space than the original tenant is occupying.

Nature of Substituted Premises

It goes without saying that the replacement space must be equal to or greater than the original space in every manner. Often, a relocation provision will use the word “comparable,” but this could arguably be “close to, but not quite as good” as the original space, and the tenant should not have to occupy anything less than exactly what they had before. As stated above, since most office space is fungible, the tenant need only make sure that: 1) the square footage is at least equal in size to the prior space, with the same number of interior offices, windows, bathrooms, and other amenities (such as a kitchen area, number of conference rooms, etc.); 2) the location is at least as desirable (as reasonably determined by the tenant ' i.e., a second-floor space with windows facing the street in a high-rise building is not as desirable as a top-floor space with a lake or ocean view); 3) the tenant finish is of equal or greater quality (if the tenant had previously installed gold faucets, it should not settle for building-standard faucets). The tenant should have the ability to approve any and all plans and specifications.

Landlord's Payment Obligations

Typically, a landlord will offer to pay the cost of moving a tenant's fixtures, furnishings and furniture. The tenant should expand this to include any equipment and should not be required to move until all systems are operational, including all telephone systems, computer and telecommunication equipment and cabling. The landlord should pay for new stationery identifying the substitute space, as well as the cost of mailings to advise the tenant's customers, vendors, insurance companies, etc., of the move. Until the tenant can walk into the new space and immediately begin operating there, the tenant should not be required to abandon the original space. The landlord should be required to use reasonable or best efforts to meet the time frame the parties agree should be used for the relocation to occur, as the tenant will have advised many third parties (movers, customers, service providers) when the move will take place and again, it would be disruptive to reschedule or notify these parties the date is incorrect.

No Additional Cost to Tenant

Unless the tenant has asked for a larger space than the original premises, or has requested that the tenant finish greater than what previously existed, the tenant should not bear any cost whatsoever when the move takes place. If the substitute premises happens to be larger (remember, it should never be smaller unless the tenant has requested it and receives a reduced rent), the tenant should not be required to pay any more rent for the larger space. Rent should stay at the same dollar amount (and not recomputed on a square-foot basis) as existed at the original space, and the tenant should not be required to pay an additional proportionate share of expenses (taxes and operating costs) for having more space.

Right to Terminate

Finally, if the landlord complies with all of the above requirements, there still may be instances where the tenant is just dissatisfied with the substituted space. In those situations, the tenant should have a small window of time simply to terminate the lease unless the landlord rescinds the relocation. If the tenant exercises this termination right, it should be given a reasonable period of time to find suitable replacement space.

Additional Considerations for the Retail Tenant

While a smooth uninterrupted transaction is always a tenant concern, the retail tenant is even more concerned about preventing any interruption of its operations, lest it causes the tenant to lose customers even temporarily. If a customer cannot locate the store, or does not want to exert any effort to find the new location and can shop at an alternative store, a temporary loss can become permanent. Therefore, the tenant should not allow any relocation during particularly peak seasons such as the holiday months of November and December, or back-to-school time in August and September, when most sales occur and people are often more hurried or will quickly find alternatives to save time or money. It is likely that there are certain heavier traffic areas in a shopping center, and, therefore, the tenant must only allow a relocation to areas with equal traffic or which are even busier than the one in which the tenant is presently located. Is the new location near a main entrance or a dead-end area? Is the new location similarly adjacent to an anchor tenant or the food court (which is a more desirable area)? Are there similarly merchandised stores for which the tenant is presently clustered? For example, if the tenant in question operates a women's accessory store and is currently located adjacent or very near four women's apparel stores, then moving the tenant to a distant location (even if a heavy traffic area) which is surrounded by men's or toy stores only, could adversely affect sales going forward.

Conclusion

Every tenant's circumstance is different. Even though a landlord may view all its office space as fungible, your tenant client may not agree, and should consider the above precautions before agreeing to a relocation of its space. Retail tenants must also consider the season and the tenant mix at the new location, and have veto rights in certain circumstances.

The three most important issues in relocation (only one of which is location):

• Where?
• When?
• Cost?

Answers to these questions will determine the extent to which a tenant will willingly go along with its landlord's offer, or negotiate vehemently for alternative solutions.

Ira Fierstein, a member of this newsletter's Board of Editors, is a partner in the Chicago office of Seyfarth & Shaw, LLP. He has more than 30 years of experience counseling national developers, shopping center owners, limited liability companies, partnerships and other clients.