Landlord’s Right to Relocate a Commercial Tenant

One provision that is common to commercial leases (both retail and office) is landlord’s relocation option. Generally, a relocation option will give the landlord the right, at its sole option, to relocate the tenant to a comparable space within the given development or building.

For landlords, these provisions are quite advantageous. They provide the landlord with the flexibility to shift around existing tenants (who are already tied to leases) in order to accomodate new tenants the landlord is courting. The common situation is as follows:

1. Each floor of a building consists of four 2,000 square foot suites.
2. Tenant A rents Suite 101 with 2,000 square feet.
3. Tenant B wishes to rent an 8,000 square foot space, and the first floor is the most vacant space in the building, with 6,000 vacant square feet in suites 102, 103, and 104.
4. The landlord exercises his right to relocate Tenant A to suite 202, which also has 2,000 square feet.
5. The landlord combines suites 101-104 to lease Tenant B 8,000 square feet.

Of course, this is a simplified example, but one can see that a landlord would benefit from this provision, as it makes the landlord’s building or development attractive to a larger number of tenants.

In office space, the concerns with a relocation are fewer than those for retail space. Generally, office space is interchangable within a building. A tenant must, however, be sure to negotiate certain items into the relocation provision.

First, the landlord should be responsible for all costs associated with the relocation. This includes finishing out the new space, the actual moving costs, and even the costs associated with redirecting services (such as phone) and reprinting letterhead and business cards. The landlord will usually accept such a change to the provision. Effectively, the shifting of costs merely makes the landlord factor those costs into an analysis of whether or not the new lease is attractive enough to exercise its relocation option.

In addition to cost allocation, office tenants must be sure to include an acceptable notice procedure in the relocation option provision. The possible interruption of business activities involved in a move justifies requiring the landlord to give at least 30 days notice of relocation. Also, the relocation should not materially affect tenant’s business, meaning that landlord should have the new space ready for tenant before tenant must leave the old space.

For retail tenants, the consequences of relocation could be significantly stronger.  Retail tenants often value their location, and will pay a premium for the right to rent certain space.  Thus, if a landlord can freely move them to another space without adjusting rent or any other lease terms accordingly, the tenant could lose the benefit of its bargain in the lease.  Therefore, retail tenants should be much more diligent regarding the negotiation of a landlord’s relocation option.

First, retail tenants will benefit from the cost allocation, notice, and non-interruption concepts discussed above for office tenants.  In addition, though, retail tenants should make landlord’s relocation option non-exclusive.  In other words, the tenant must agree to be relocated.  Requiring tenant approval allows the tenant to determine whether the new space is truly comparable to the current space.  Items such as location within the development, relation to neighboring tenants, and visibility will weigh greatly in the tenant’s decision.  An approval right could also be sought by office tenants, but without a justifiable reason for approval, landlords have little incentive to accomodate such a request.

A final wrinkle that is common to relocation provisions, particularly those that grant tenant approval rights, is a landlord termination option.  Basically, the landlord may terminate the lease if tenant does not agree to relocate.  No tenant should accept such a termination option within this provision.  Basically, the landlord will have the right to remove the tenant if it determines the new lease is more favorable financially.  As a tenant that has put time and money into finding the ideal space and negotiating its lease, an ousted tenant would be seriously injured by landlord’s exercise of a termination right.  Careful drafting and attention to detail can avoid such a situation.

Tenants should remember that landlord’s relocation option will typically only benefit the landlord.  Many times, a tenant can use this provision as a “carrot” in negotiations.  However, tenants must be sure to protect their rights in the process.