Tenants can prevent costly landlord-induced relocation costs with the right lease inclusions.
Best Practices: Landlord Relocation Right Remediation
A young associate in the firm recently came to me with a question about a new client that had been served 30 days’ notice to be relocated. He showed me the lease the previous broker had negotiated, and the “landlord relocation-right” clause was very vague; it was merely two sentences and the only thing that was certain is that with 30 days’ notice, the tenant could be moved at any time by the landlord to comparable space, and the landlord would pay for a short list of undefined relocation costs.
Tragically this happens more than I would care to think about. This experience, coupled with another recent positive experience with a client of mine dodging a relocation, mentioned in my previous blog got me thinking that I should write a blog to advise and warn those small, medium, and sometimes even large companies that find themselves unfortunately in a lease negotiation with a landlord insisting on the relocation right clause – exposing them to potentially massive business disruption that is expensive and inconvenient.
How do tenants mitigate exposure to a painful relocation if the landlord insists on including a Relocation Right in the lease?
Every tenant is in a different situation, so there are no hard and fast rules. However, your representation team (both your broker and your real estate lawyer) needs to be strategic in language negotiated to clearly define the landlord right, various mechanics of exercising the right, and the limitations of the right to protect your business. Let’s discuss some concepts to consider in negotiating language for this clause:
The lease should always say that the landlord will pay the costs associated with a relocation of a tenant induced by the landlord. This includes:
- Moving costs
- Printed materials that require updates due to the move
- Relocation announcements
- All operational expenses (including but not limited to: phone systems, re-wiring low voltage cabling, security systems, tearing down and setting up of furniture, fixtures and equipment, supplemental HVAC systems, etc.)
- Business income/revenue lost (tenant must be able to prove income has been lost)
- Special tenant improvements or upgrades above the building standard which can include both functional (e.g. built in bookshelves) and aesthetic improvements (e.g. upgraded floor coverings)
Tenants can incur all kinds of costs in a landlord-induced relocation, far beyond those listed here. Yes, the landlord should always be responsible for the costs but the onus is always on the tenant to not only prove those costs, but also to make sure that the lease clause pertaining to relocation-related expenses is as broad as possible and includes language detailing how the landlord will make the tenant whole including timing and method of payment (e.g. paying various vendors directly, reimbursement, rent credit).
Avoiding the interruption and disruption of business is of primary importance to the tenant. Every tenant has a different business situation, so the approach isn’t universal, but it is important to make sure the relocation provision language allows the tenant to prepare for the relocation properly so as not to interrupt its business. Here is some language tenants should consider negotiating into the relocation right clause of their leases:
- Adequate Minimum Notice – Sufficient notice must be given regarding landlord-induced relocation. The tenant needs to be sure to have enough time to prepare for a move before the move happens. Only the tenant knows how much time they will need to marshal and organize resources to take on such an unexpected task and avoid business disruptions.
- Blackout Periods – Certain tenants cannot afford a disruptive move during certain times of the year because of the critically serious business disruption it would cause. Could you imagine an accounting firm having to relocate in the middle of tax season? Such an imposition would be extremely disruptive and unacceptable.
- Specified Timing of Move – The actual time of the move should be at the tenant’s discretion, depending on their business and other logistics. One tenant may prefer a weekend move while another tenant a weekday move.
- Extensions on Relocation Timing – Extensions are essential because the construction/buildout should be at the tenant’s convenience. Often the relocation space must be improved to meet the comparable space standard, and we all know it is not unusual for delays to occur during construction or fixturization of space.
- Concessions – Tenants want to make sure that landlord concessions are extended to account for any relocation time period that occurs during a landlord concession or inducement. For example, if relocation happens during a rent abatement period, that period should be extended to account for business disruption and relocation time.
- Specified Preparation Times – Expressly state the amount of time needed to prepare for the move as well time for preparation of the new space in the lease language.
“Comparable space” is a very vague concept if not clearly outlined in the lease by several different factors. Consider including the following factors in the clause language:
- Size & Efficiency – Size is an obvious factor when comparing spaces, but efficiency of space is sometimes overlooked. Tenants need to be sure that the relocation space has both comparable usable and rentable space. Language should be clear as to how the rent is treated when spaces aren’t a comparable size. When a relocation space is larger than the tenant’s previous space, the tenant must insist that the rent is adjusted to be no more than the original space because the relocation is at the landlord’s request.
- Quality – This must be very clearly laid out and tenant needs to specify what the key factors are that determine the quality of the space. Examples of this could be:
- The amount of offices with window lining
- A specific view
- A range of floors in the building that are acceptable
- The existence of balconies
- Amount of storage space
- Proximity to certain common area amenities
- Acceptable location due to sun exposure
- Better access to parking
- Noise pollution from a neighboring business
- Business Environment – Similar to quality, this could mean more nuanced details like specific layout functionality, signature views, or other key features of the original space like a balcony or outdoor area that a firm uses to entertain clients regularly, for example.
- Floorplate Location – If having an original suite with elevator lobby exposure was key in the selection of the space, moving to the corner of a floor would be unacceptable to some tenants.
In the event of a forced relocation, sometimes the landlord is unable to provide its tenants comparable space in a reasonable timeframe. Having explicit language that gives the tenant a termination right is crucial in this situation. If a relocation scenario arises, this language may even dissuade the landlord from ever attempting to exercise the right if they value enough of the “bird in hand” (i.e. the tenant’s existing revenue stream, tenancy, and relationship). Landlords don’t like to grant termination options in lease negotiations, but it is a reasonable ask, especially if there are critical factors that must be met in order for the relocation to be acceptable.
The “How”… Spell it All Out
Spelling out how this right affects the lease after it is invoked should be worked out in the original lease language – i.e. will there be an amendment? New lease? Addendum? Is it silent on how adjustments are made? If so, this is bad news for the tenant, especially if they don’t have any leverage. What is the timing of relocation expense reimbursement? When do other adjustments affecting the tenant’s budget get adjusted? Drafting a great clause on the mechanics of how things will work is as key to the tenant as the negotiated terms or relocation right itself.
Protect yourself! Properly documenting this landlord right and how it will be executed if invoked is critical. If the rules of the game are not spelled out, the landlord will likely dictate what happens and the tenant is guaranteed to lose. Tenants beware!
Love and Light!
Keyser is a world class commercial real estate and business advisory firm exclusively serving tenants/end-users across all industries and is headquartered in Phoenix, Arizona.
Darius Green is an associate broker and founding member of Keyser. Darius advises and represents clients locally and nationally across industries in every stage of the real estate process including lease renewals, relocations, consolidations, subleases, acquisitions, dispositions, strategic planning, demographic and site consulting, and lease portfolio management. Darius is a Fiesta Bowl Committee member and a graduate of both the Sandra Day O’Connor College of Law and Northwestern University.
Tenant Improvement Allowances (TIA) can be a game-changer for businesses looking to create the perfect workspace.