Landlord's Right of Relocation

If possible, a tenant should insist that the relocation right is based upon circumstances that not only benefit the landlord, but also would benefit the tenant. For instance, a relocation may be based upon the addition of a major tenant to the building where the tenant is located and that major tenant requires the square footage occupied by the tenant's premises. (In a retail setting, presumably the tenant would derive a benefit from the leasing of space to the major occupant, so long as the major occupant does not directly compete with the tenant's permitted use.)

Other conditions that may trigger a landlord's right to relocate a tenant may include:

• A substantial renovation to the building;
• Relocating an entire area of the building ( e.g., if a landlord of a shopping center elects to relocate the entire food court of a shopping center);
• The occurrence of a casualty event or eminent domain event which involves all or a portion of the tenant's premises, or
• Removal of a portion of the building where such area involves all or a portion of the tenant's premises.

In the event the condition precedent is satisfied, then the landlord would be obligated to provide the tenant with certain written notice informing the tenant that the condition precedent has occurred and advising the tenant as to the new location (“New Premises”) that is being offered to the tenant. The length of time of this notice is open for negotiation, but the notice should be long enough so that the tenant can accept the New Premises (or dispute whether the New Premises satisfies the criteria for relocation contained in the lease) and so that the New Premises can be prepared for occupancy by the landlord.

Issues to be Addressed in the Relocation Provision

The tenant should address most, if not all, of the following issues when addressing the relocation provision in a lease:

1. Hazardous Materials

The New Premises must be delivered free of hazardous materials. Specifically, the tenant should provide that if the New Premises contains any hazardous materials, the landlord will remove same at landlord's cost, prior to delivering the New Premises to tenant.

2. Size, Dimensions and Location

The New Premises should be substantially the same size and substantially the same dimensions as the existing premises. Essentially, the tenant has negotiated for a certain space with certain given dimensions. A tenant should not be required to occupy space substantially different from that which it had originally negotiated to occupy.

Further, there may be certain locations within the building where the tenant does not want to be located. The parties should address this concept at the inception of the lease negotiation by identifying those areas on an exhibit that designates the building and indicates those areas for which relocation of the tenant would be prohibited.

3. Cost of Relocating

Relocating the tenant should be at the landlord's sole cost. This issue really has two components. First, whether the landlord or the tenant is performing the actual relocation of the tenant's property to the New Premises. Second, a provision designating that the landlord will pay all costs of relocating the tenant to the New Premises.

4. No Additional Costs

In the event the New Premises is larger than the existing premises, the tenant will not pay any additional costs associated with the additional size of the space. Since this relocation is being made at the landlord's election, the tenant should not be forced to pay an increased portion of additional costs and expenses like operating expenses or real estate taxes, simply because the New Premises happens to be larger than the existing premises. Further, the landlord should not have the right to pass these additional costs through operating expenses under the lease.

5. Timing for Relocation

The tenant should not be obligated to relocate from its existing premises until the landlord has made the New Premises ready for the tenant's occupancy. The tenant should not have any “down time” between when it occupies the existing premises and the time that the tenant opens for business in the New Premises.

6. Costs

All costs for preparing the New Premises for the tenant's occupancy should be paid for by the landlord. These costs may include, but are not limited to, causing all utility services to be brought to the New Premises with the same capacities as they were serving the existing premises, all costs of improving the New Premises to the same design and improvement level that were present in the existing premises, all costs of compliance with all ordinances and codes (e.g., ADA and other building codes) and the costs of transporting the tenant's inventory and property to the New Premises. Often, these relocations will need to occur at night or when the building is closed for business. In such cases, the landlord should also be responsible for paying all costs of having the tenant have one of its employees present when the relocation is occurring.

7. Adjustment to Rent

While the rent should never be higher than that which the tenant was paying in its existing premises, if the New Premises is slightly smaller than the existing premises, the tenant should derive the benefit of reducing its rent based upon the square footage of the New Premises as compared to the square footage of the existing premises.

8. Temporary Signage

The landlord should be responsible, at the landlord's sole cost, to place signage within the building designating the location of the New Premises. This temporary signage should occur for a set period of time [e.g., six months] after the relocation has occurred. Further, the tenant may want to negotiate for the landlord to place certain advertisements within certain advertising media that will inform the public that the tenant's business has been relocated within the building.

Landlord's Termination Right

Often, the landlord will want to reserve a right to terminate the lease, if the tenant refuses the proposed New Premises or in the event there is no space available within the building for the landlord to offer the tenant alternative space. While the tenant should strenuously resist any right of the landlord to terminate the lease in the event an alternative New Premises is not agreed upon by the landlord and the tenant, if the landlord is insistent that the termination right appear in the lease, then at a minimum, the tenant should negotiate a “buy-out” of the its current lease, concurrent with the termination of the lease. The “buy-out” amount could include the unamortized value of leasehold improvements located in the existing premises, as well as certain profit from the business that the tenant expected to receive over the balance of the term of the lease, as well as certain relocation or moving expenses, including brokers' fees, marketing costs and moving expenses.

The formula to determine the “buy-out” amount should be placed in the lease, so that there is no dispute as to the amount that is owed to the tenant at the time the landlord's termination election is exercised. Further, the “buy-out” amount should be payable prior to the date that the tenant is obligated to vacate the building. Therefore, the tenant should not be obligated to vacate the premises unless and until it had received the termination amount and then had a period of time within which to vacate the premises. This right would prevent the tenant from having to institute litigation proceedings in order to collect the termination amount once the tenant is out of possession of the premises.

Conclusion

By carefully addressing the relocation provision in its lease document, the tenant can protect itself from the unfortunate circumstance of having to relocate its business operation to another location within the building without being adequately protected from the myriad problems that could arise as a result of the relocation.

The relocation provision is often buried in the middle of a lease document and is often not carefully addressed by the tenant at the time that the landlord and tenant agree upon the terms of the lease. As a result, a tenant would be wise to examine carefully the relocation request being made by the landlord and to address adequately the concerns that will arise therefrom. By incorporating the concepts addressed in this article, a tenant can adequately protect its interests, even if a relocation of its business operations is required during the term of the lease.

In most commercial leases, even though a tenant has the right to lease a particular space for a certain period of time, the landlord will retain the right to relocate the tenant to another location within the applicable building during the term of the lease. Sometimes, the right for the landlord to relocate the tenant is unlimited (i.e., the landlord can elect to relocate the tenant for any reason or no reason at all). In other instances, this unlimited right of relocation is coupled with the right for the landlord to terminate the lease if the landlord chooses not to relocate the tenant or if relocating the tenant is not financially feasible for the landlord. In other situations, the landlord retains a limited right to relocate the tenant to another location within the building, but only if certain conditions are satisfied.

This article addresses issues that should be raised by the tenant based upon the landlord's relocation right, as well as certain strategic requirements that the tenant should insist upon before allowing the landlord to have a relocation right in the lease.

Conditions Precedent to Landlord's Relocation Right

If possible, a tenant should insist that the relocation right is based upon circumstances that not only benefit the landlord, but also would benefit the tenant. For instance, a relocation may be based upon the addition of a major tenant to the building where the tenant is located and that major tenant requires the square footage occupied by the tenant's premises. (In a retail setting, presumably the tenant would derive a benefit from the leasing of space to the major occupant, so long as the major occupant does not directly compete with the tenant's permitted use.)

Other conditions that may trigger a landlord's right to relocate a tenant may include:

• A substantial renovation to the building;
• Relocating an entire area of the building ( e.g., if a landlord of a shopping center elects to relocate the entire food court of a shopping center);
• The occurrence of a casualty event or eminent domain event which involves all or a portion of the tenant's premises, or
• Removal of a portion of the building where such area involves all or a portion of the tenant's premises.

In the event the condition precedent is satisfied, then the landlord would be obligated to provide the tenant with certain written notice informing the tenant that the condition precedent has occurred and advising the tenant as to the new location (“New Premises”) that is being offered to the tenant. The length of time of this notice is open for negotiation, but the notice should be long enough so that the tenant can accept the New Premises (or dispute whether the New Premises satisfies the criteria for relocation contained in the lease) and so that the New Premises can be prepared for occupancy by the landlord.

Issues to be Addressed in the Relocation Provision

The tenant should address most, if not all, of the following issues when addressing the relocation provision in a lease:

1. Hazardous Materials

The New Premises must be delivered free of hazardous materials. Specifically, the tenant should provide that if the New Premises contains any hazardous materials, the landlord will remove same at landlord's cost, prior to delivering the New Premises to tenant.

2. Size, Dimensions and Location

The New Premises should be substantially the same size and substantially the same dimensions as the existing premises. Essentially, the tenant has negotiated for a certain space with certain given dimensions. A tenant should not be required to occupy space substantially different from that which it had originally negotiated to occupy.

Further, there may be certain locations within the building where the tenant does not want to be located. The parties should address this concept at the inception of the lease negotiation by identifying those areas on an exhibit that designates the building and indicates those areas for which relocation of the tenant would be prohibited.

3. Cost of Relocating

Relocating the tenant should be at the landlord's sole cost. This issue really has two components. First, whether the landlord or the tenant is performing the actual relocation of the tenant's property to the New Premises. Second, a provision designating that the landlord will pay all costs of relocating the tenant to the New Premises.

4. No Additional Costs

In the event the New Premises is larger than the existing premises, the tenant will not pay any additional costs associated with the additional size of the space. Since this relocation is being made at the landlord's election, the tenant should not be forced to pay an increased portion of additional costs and expenses like operating expenses or real estate taxes, simply because the New Premises happens to be larger than the existing premises. Further, the landlord should not have the right to pass these additional costs through operating expenses under the lease.

5. Timing for Relocation

The tenant should not be obligated to relocate from its existing premises until the landlord has made the New Premises ready for the tenant's occupancy. The tenant should not have any “down time” between when it occupies the existing premises and the time that the tenant opens for business in the New Premises.

6. Costs

All costs for preparing the New Premises for the tenant's occupancy should be paid for by the landlord. These costs may include, but are not limited to, causing all utility services to be brought to the New Premises with the same capacities as they were serving the existing premises, all costs of improving the New Premises to the same design and improvement level that were present in the existing premises, all costs of compliance with all ordinances and codes (e.g., ADA and other building codes) and the costs of transporting the tenant's inventory and property to the New Premises. Often, these relocations will need to occur at night or when the building is closed for business. In such cases, the landlord should also be responsible for paying all costs of having the tenant have one of its employees present when the relocation is occurring.

7. Adjustment to Rent

While the rent should never be higher than that which the tenant was paying in its existing premises, if the New Premises is slightly smaller than the existing premises, the tenant should derive the benefit of reducing its rent based upon the square footage of the New Premises as compared to the square footage of the existing premises.

8. Temporary Signage

The landlord should be responsible, at the landlord's sole cost, to place signage within the building designating the location of the New Premises. This temporary signage should occur for a set period of time [e.g., six months] after the relocation has occurred. Further, the tenant may want to negotiate for the landlord to place certain advertisements within certain advertising media that will inform the public that the tenant's business has been relocated within the building.

Landlord's Termination Right

Often, the landlord will want to reserve a right to terminate the lease, if the tenant refuses the proposed New Premises or in the event there is no space available within the building for the landlord to offer the tenant alternative space. While the tenant should strenuously resist any right of the landlord to terminate the lease in the event an alternative New Premises is not agreed upon by the landlord and the tenant, if the landlord is insistent that the termination right appear in the lease, then at a minimum, the tenant should negotiate a “buy-out” of the its current lease, concurrent with the termination of the lease. The “buy-out” amount could include the unamortized value of leasehold improvements located in the existing premises, as well as certain profit from the business that the tenant expected to receive over the balance of the term of the lease, as well as certain relocation or moving expenses, including brokers' fees, marketing costs and moving expenses.

The formula to determine the “buy-out” amount should be placed in the lease, so that there is no dispute as to the amount that is owed to the tenant at the time the landlord's termination election is exercised. Further, the “buy-out” amount should be payable prior to the date that the tenant is obligated to vacate the building. Therefore, the tenant should not be obligated to vacate the premises unless and until it had received the termination amount and then had a period of time within which to vacate the premises. This right would prevent the tenant from having to institute litigation proceedings in order to collect the termination amount once the tenant is out of possession of the premises.

Conclusion

By carefully addressing the relocation provision in its lease document, the tenant can protect itself from the unfortunate circumstance of having to relocate its business operation to another location within the building without being adequately protected from the myriad problems that could arise as a result of the relocation.

The relocation provision is often buried in the middle of a lease document and is often not carefully addressed by the tenant at the time that the landlord and tenant agree upon the terms of the lease. As a result, a tenant would be wise to examine carefully the relocation request being made by the landlord and to address adequately the concerns that will arise therefrom. By incorporating the concepts addressed in this article, a tenant can adequately protect its interests, even if a relocation of its business operations is required during the term of the lease.