United States: Move It Or Lose It: Relocation Provisions In Commercial Lease Agreements

Not all tenants are created equal. Shopping center landlords can agree that having a high-end retailer on their roster often beats out the local mom-n-pop shop. But what is a landlord to do when that top retailer comes along after the lease with the local mom-n-pop shop is already inked?

Shopping center owners will greatly benefit from the ability to move tenants around during the tenants' term without breaching or canceling that tenant's lease. But this flexibility is not always easy on the tenant. Sometimes, the tenant has established itself in a specific location or spent time and money arranging its current space. The first step in dealing with such an issue is therefore to check if it is covered under the lease terms. If it is, it may be in the form of a relocation provision.

A relocation provision provides the landlord with a level of flexibility in the event a new tenant considers moving into the center, which may result in more foot traffic or prestige, or if there are efforts to sell, expand, change or otherwise develop the property. Such a provision will grant the landlord the right to relocate a tenant to an alternate space within the shopping center or to another property owned by the landlord. A relocation provision may look like this one that an Illinois court once analyzed:

Landlord shall have the right upon at least one hundred eighty (180) days' prior written notice to Tenant to relocate Tenant and to substitute for the Leased Premises other space in a building in the Riverway Complex or in another building owned by Landlord, or an affiliated entity of Landlord, in the vicinity containing at least as much square footage as the Leased Premises, in a location and on such terms as may be mutually satisfactory to Landlord and Tenant. Landlord shall improve such substituted space, at its expense, with improvements at least equal in quantity and quality to those in the Leased Premises as of the date of the proposed relocation. Landlord shall reimburse Tenant for all reasonable third party expenses incurred in connection with, and caused by, such relocation.

Although California courts have not yet published any opinions regarding the enforceability of a relocation clause in a commercial lease contract, a general policy favoring the private freedom to contract allows the parties to get creative. This creature of contract is not boilerplate, so the parties should negotiate its inclusion and its terms.

A landlord will obviously want as much flexibility as possible, granting it the absolute right and discretion to move the tenant to any location, near or far, at a moment's notice. Typically, the landlord will want the sole discretion and absolute right to relocate the tenant for any reason. And if the landlord has a lot of leverage, that's what the landlord should go for.

From the tenant's perspective, here are a few pointers. First, a tenant should try to negotiate for as much notice as possible. Also important is clarification as to what will be considered a comparable or acceptable space for relocation. Will the space be of equal square footage? How far will the tenant be moved? Another important thing, of course, is money. Who will bear the cost of relocation? Will the landlord reimburse the tenant for any loss or reduction in earnings? Will there be a reassessment of base rent in the event there is a change in square footage or the new space gets less foot traffic? Finally, the parties should discuss when the relocation provision will be triggered.

Be mindful of two things. Even with the freedom to contract, parties are still bound by the general covenant of good faith and fair dealing implied in every contract, so relocation cannot be motivated by bad faith. Second, even if a landlord is granted the "absolute" right and discretion to relocate, the landlord may not relocate a tenant if it will result in the tenant violating a law or a regulation that governs its business.

Because the flexibility that comes with a relocation provision is important to a landlord, the landlord may be more willing to negotiate its terms. Careful negotiation is key. The parties should look at least one year down the road for the potential of change. Be as specific as possible before signing the lease. The purpose of pre-contractual negotiation is to avoid subsequent litigation. Landlords and their counsel should take advantage of a prospective tenant's willingness to be flexible prior to inking a deal so they can enjoy the flexibility during the tenancy in case that perfect, high-end, credit-worthy tenant comes a-knocking.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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