With strong office markets in many parts of the country, landlords are becoming rather bullish. In that spirit, they are looking to maximize leasing flexibility in accommodating new and growing tenants. One leasing flexibility tool that landlords have in their toolbox is the right in the lease to relocate a tenant. While tenants want to see their landlords succeed in keeping the building well occupied, they are more concerned with maintaining a productive office. Relocation is extremely disruptive for businesses when they are planning to move at the expiration of their lease; it’s even worse when the landlord issues you a notice out of the clear blue that they are going to relocate you. Even though the relocation move is typically paid for by the landlord, assuming the tenant has negotiated that into its lease, that is little consolation for the intangible loss in productivity to the tenant’s business. Outlined below are strategies to fundamentally eliminate this right and, where that is not feasible, to neuter it as much as possible.
First, where possible, tenants should try to eliminate this relocation right at the beginning of the lease negotiations. A good place to start is with the tenant’s initial request for proposal (“RFP”). It could be a simple statement that the landlord shall not have any relocation rights with respect to the leased space. What will drive the tenant’s likelihood to succeed on this point are its leverage, relative size in the building and the growth of neighboring tenants in the building. For a small office, a tenant may not want to waste negotiating capital on this point; however, it is still prudent to initially request that it be waived by the landlord as surely their form lease contains a relocation right.
Next, if the tenant is unable to have the right waived by the landlord, the tenant should build in certain safeguards to limit the landlord’s use of this right and to be sure that the landlord covers all related costs of the move. It should be noted that landlords don’t approach relocations lightly as it is costly and that cost is typically absorbed by the landlord and their expanding tenant.
Here are some key considerations that tenants should consider in negotiating the relocation provision:
- Is it effective after at least the 12th month following the commencement of the lease term? Be sure that the landlord cannot relocate you before you move into or construction has started on your new space!
- Is the right limited to one or two times over the lease term?
- Is landlord prohibited from relocating tenant during the last 12 months of the lease term?
- Does tenant receive at least 90 days prior notice before the effective date of relocation?
- Does the notice contain all terms and facts regarding the proposed relocation, including scaled drawings of the proposed relocation space?
- Is the relocation space limited to the tenant’s current building?
- Is the relocation space substantially similar to the original leased premises in shape, size, and location on the floor plate (including view) and at the same or higher floor?
- Is the construction standard for the relocation space based upon the drawings used to complete the original leased premises and will the landlord reconstruct the relocation space at its sole cost?
- If the relocation space is larger than the original leased premises, will the rent (including tax and operating expenses) remain the same as the original space?
- If the relocation space is smaller than the original space, can tenant reject the smaller relocation space?
- Where tenant accepts the smaller relocation space, will tenant’s rent and share of expenses be reduced accordingly?
- Will tenant’s expansion and renewal options transfer to the relocation space?
- Can tenant reject landlord’s right where the relocation space is on the same floor as a competitor?
- Is landlord obligated to pay for all related relocation costs? Be sure that landlord will pay for physically moving tenant’s personal property and equipment to the relocation space and will reimburse tenant for the actual out-of-pocket costs that tenant incurs in connection with the relocation (including moving expenses, furniture relocation, telecommunication relocation, and stationery expenses).
- Will landlord reimburse tenant for costs it incurs for its consultants, architects and attorneys?
- Will the move be completed after business hours and in a manner so as to minimize any material interference with tenant’s business operations?
- Where a tenant has established vendor agreements (i.e., security, furniture, IT), does tenant have complete discretion in selecting vendors for the relocation of their premises?
Blackacre Advisors LLC
DISCLAIMER. Our writings are from a real estate transaction perspective and for informational purposes only. Nothing herein shall be considered legal, accounting, tax, or architectural advice. Please consult with the appropriate professional(s).