When negotiating a commercial lease, a landlord often seeks to include a relocation clause that would allow the landlord the right to move the tenant from the original leased premises to a different location, most frequently in order to accommodate new tenants or to allow for the renovation, alteration, re-merchandising, or demolishing of the commercial property. While beneficial for the landlord, a relocation is a significant inconvenience to a tenant. Not only would the tenant have to move its trade fixtures, furniture, inventory, and other belongings, a fit-up of the new premises would also be required.
In addition, the move may interfere with the tenant’s business operations, affecting the tenant’s operating costs, sales and revenue, as well as the tenant’s relationship with its current customers or clients. As such, if the landlord is insisting on a relocation clause in the commercial lease and the tenant lacks sufficient bargaining power to have the relocation clause removed, the tenant should seek to limit the impact of such a clause by negotiating certain protections. Outlined below are some considerations for a tenant negotiating a relocation clause.
- Tenant’s Consent
On occasion, a tenant will be successful in negotiating the right to consent to a relocation, such that the landlord would be required to obtain the tenant’s consent before relocating the tenant. This may work with motivated landlords who have no existing plans that would require the tenant to relocate and who wish to promptly finalize the commercial lease.
- Limiting Triggering Event
A tenant may attempt to limit the circumstances under which the landlord can relocate the tenant. For instance, a landlord may be restricted to exercising its relocation right only if it plans to renovate, alter, or demolish the premises. In addition, the tenant may wish to indicate that the relocation right cannot be exercised in order to lease the premises to another tenant. Consideration should also be given to limiting the number of times that the tenant may be required to relocate.
- Location and State of New Premises
Ideally, a tenant would want the ability to approve the location of the new premises. However, this is often not possible. At a minimum, the tenant should negotiate that the new premises would be similar to the original premises it leased. It is recommended to specify the criteria for said similarity – for example, with respect to location (considering visibility, accessibility, foot traffic, etc.), size (perhaps including minimum and maximum limits), and finish of the new premises. The Tenant should also consider specifying whether or not it can be relocated only within the same building or commercial property or may be relocated to premises located outside of the building or commercial property in which the original leased premises are located.
- Recouping Costs of Relocation
A tenant should consider requiring the landlord to pay for the costs of relocation and should identify precisely which costs will be paid by the landlord. Landlords may cover the direct costs of relocation, such as costs of moving trade fixtures, furniture, inventory, and equipment, as well as costs to construct the new premises. However, a tenant should also consider indirect costs that it may incur, such as costs for temporary signage directing customers or clients to the new premises, costs incurred to advertise the new location, costs of changing stationery and business cards, loss of profits, and undepreciated capital costs of leasehold improvements installed in the original leased premises.
- Impact on Rent
Rent is often based on the square footage of the leased premises. If the new premises differ in size from the original leased premises, the rent will change as well. A tenant may wish to negotiate a cap on the increase in rent and/or on the increase in the size of the new premises.
If the new premises will be smaller or will be located in an older building or less suitable space, the rent should be decreased. If the new premises will be located in a newer building, the tenant may wish to negotiate a cap on the increase in operating costs.
- Timing and Advance Notice
A tenant may wish to negotiate certain times during which it cannot be required to relocate – during busy seasons, the first and/or last few years of the lease term, etc. In addition, if fit-up of the new premises will be required, a clause should be included specifying that the tenant is not required to relocate to the new premises until they have been fully constructed, are in “move in” condition, and ready for the tenant to commence carrying on its permitted use.
A landlord should also be required to provide the tenant with sufficient advance notice of the relocation, such that the tenant will have time to arrange for the move, fit-up the new premises, and notify its customers or clients of the new location.
- Extension or Termination of Lease
If a tenant is relocated, it may wish to be able to extend the lease term, especially where there may be downtime between the closure of the original premises and the tenant opening in the new location.
Where the tenant has some bargaining power, the tenant may wish to negotiate for a right to terminate the lease if relocation is required or where the tenant believes that the new premises are unsuitable. Where successful, the tenant should also add a provision requiring the landlord to compensate the tenant for the undepreciated capital costs of the leasehold improvements that the tenant installed in the original leased premises.
Where a commercial tenant is unable to negotiate for the inclusion of all of the above-mentioned protections, the tenant should identify which considerations are most important to it and negotiate appropriately.
This blog post was written by Marina Abrosimov, a member of the Business Law team. Marina can be reached at 613-369-0363 or at firstname.lastname@example.org.