How to Negotiate and Create an Effective Tenant Relocation Clause
We’ll give you seven key terms to put into your relocation clause.
Having the flexibility to move current tenants to different locations at your property enables you to optimize profitability at your malls, offices, and other multi-tenant locations. For example, making space that’s currently leased available may be necessary to lure a desirable new tenant or accommodate a current tenant whose business and need for physical space are expanding. The problem is that the tenants you want to move may not want to relocate. If they dig in their heels, you face a nasty choice: Pay the current tenant a ransom to move or forgo the business opportunity that made the relocation necessary in the first place.
The good news is that you can avoid this dilemma by planning ahead. The key: Ensure that the leases you sign with tenants give you maximum relocation rights. Here’s how to create an effective relocation clause, along with a Model Lease Clause that you can adapt to your own needs.
Relocation, Relocation, Relocation
Recognize that tenants will be reluctant to agree to let you relocate them to different space after they sign the lease. After all, they’re in that space for a reason. While you should seek to include relocation rights in all of your leases, you probably won’t get far with large and national chain tenants who have bargaining clout. But you may be successful when dealing with small and medium-sized tenants with less leverage. And these are precisely the tenants that you’re most likely to target for relocation since they’re generally much easier and less expensive to move than a big operation.
Still, you need to be reasonable and realistic. Recognize that giving a landlord relocation rights is a major concession and tenants will, rightly, demand limitations on how you use that power. Specifically, they’ll want assurances that the relocation process won’t be unduly disruptive and that the new space will be as least as desirable as the current one. In addition to allaying these concerns, spelling out the ground rules for relocation will ensure that your rights are enforceable.
INCLUDE 7 KEY TERMS IN YOUR RELOCATION CLAUSE
Giving tenants equal say in the relocation process is likely to result in disputes and delays that defeat the purpose of having relocation rights in the first place. That’s why you want to secure the right to relocate the tenant to a space that you select at your sole discretion. At the same time, you should impose reasonable limits on that discretion by establishing criteria that the relocation space must meet to allay tenants’ fears of ending up in an inferior space. The clause should also address the relocation process and its impact on the tenant’s rental and other payment obligations. There are seven things your relocation clause should cover:
1. Relocation Notice Required
Relocation is a disruptive process and tenants who agree to it will want as much advance notification as possible. Of course, the strategic opportunity prompting the need to relocate the tenant may demand swift and decisive action. The more notice you have to provide, the less flexibility you’ll have. Attorneys say that 60 days’ notice of relocation is a fair compromise and that’s what our Model Lease Clause provides for.
Negotiating Tip: There’s one more thing that a tenant may demand that our clause doesn’t include—namely, the landlord’s agreement not to relocate during its busy season, for example, November through December for a retailer or January through April for an accounting firm.
2. Size & Configuration of Relocation Space
Ideally, tenants will want to know that the relocation space will have the exact size and configuration as their current space. But don’t make that promise unless you’re 100 percent certain you’ll be able to fulfill it. To guard against all contingencies, our Model Lease Clause gives the landlord sole discretion to determine the size and configuration of the relocation space. Since this might not sit well with tenants, the clause also provides that the relocation space won’t be any smaller than a stated number of square feet of rentable area. You’ll have to negotiate that exact amount with the tenant [Clause, par. 1].
Negotiating Tip: The tenant may want other assurances regarding size and configuration, such as a maximum rentable space amount or minimum amount of frontage. Be sure to include any additional assurances you make in the lease clause.
3. Location of Relocation Space
Tenants will have legitimate concerns about where you choose to move them. For example, a tenant located near the entrance to a large department store won’t want to be relocated to a space in a wing of the mall that’s only half occupied; an office tenant with a bright space overlooking the park won’t want to relocate to a dark space facing the back of another building.
The problem for landlords is that there’s no sure way of predicting what space at the center or building will be available when and if they want to relocate the tenant. One compromise is to agree to relocate the tenant to a space anywhere within a predesignated area of the building or center called the “relocation zone.” Attach a map or blueprint that marks out the relocation zone as an exhibit to the lease [Clause, par. 2].
4. Condition of Relocation Space
Relocation can be especially problematic when alterations or improvements have been made to the current space for the tenant’s benefit. At a minimum, landlords should be prepared to assure tenants that they won’t be relocated to unfinished space. Our Model Clause goes one step further by stipulating that the relocation space will contain permanent improvements (but not trade fixtures, furnishings, equipment, and other personal property) that are “at least reasonably equivalent” to those in the current space.
The clause also requires the landlord to install or provide the improvements necessary to achieve that equivalence. Because “reasonably equivalent” is an ambiguous term, include an attachment listing the specific permanent improvements you’re obligated to provide [Clause, par. 3].
5. Tenant Duty to Pay Adjusted Rent After Relocation
Having established criteria for the relocation space, address how the relocation will affect the tenant’s obligation to pay rent. First, state that any of the tenant’s rent and other lease costs based on the size of its rentable space will be adjusted upward or downward to reflect the size of the relocation space in accordance with the formula you used to calculate the original rent or other amount [Clause, par. 4].
6. Maximum Post-Relocation Rent Increase
One problem with post-relocation rent adjustment is that the tenant may be relocated to a larger space carrying a corresponding rent increase that it can’t afford. This is a risk that landlords should be prepared to assume, attorneys advise, since the relocation to the larger space is for the landlord’s and not the tenant’s benefit. Rather than forgoing the right to an increase, share the risks with the tenant by placing a dollar amount or percentage cap on how much rent and other associated monthly charges can increase as a result of the relocation, with the cap to be determined by negotiation [Clause, par. 4].
Example: The rent for the original space is $400,000 based on 10,000 rentable square feet at $40 per square foot (assume there are no other space-based monthly charges). You agree that any rent increase for the relocation space will be capped at 10 percent of the rent for the original space. The relocation space is 12,000 square feet. Without the cap, the rent would increase to $480,000 (12,000 x $40). But the cap limits the post-relocation rent to $448,000 ($480,000 x 10% = $48,000; $400,000 + $48,000).
If the tenant insists, spell out that you agree to keep the post-relocation cap in place for the entire remaining term of the lease.
7. Consequences of Tenant Default
Having a relocation clause in place might not do you much good if the tenant later drags its feet on surrendering the space and moving to the relocation space. Defying you, the tenant might calculate, is less costly than picking up and moving. You can deter this strategy by clearly stating that the tenant’s failure to comply with its relocation duties is a material violation of the lease entitling you to reenter and exercise any and all other remedies at your disposal [Clause, par. 5].
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