Demystifying the Commercial Lease: Tenant Relocation Provisions
When I was in youth orchestras, we auditioned for admission and initial seat placement. However, those seats could be changed through a competitive process called challenges.
In a challenge, two people playing a specified passage, usually in front of the entire section. After that, the conductor would decide who played the best. That individual would advance to the higher seat, and the lower would go back at least one seat. Variations of the process included a student vote deciding who played best. I heard of one conductor who accompanied his seating decision with critical comments about every student’s performance, which added salt to the “loser’s” wounds and even left the “winners” feeling bad about their performances.
Students frequently gained upward or downward momentum. Encouraged by a “win,” a student’s confidence would increase, and they might play increasingly better and move up many seats. Unfortunately, a student having a bad day could become increasingly panicked and discouraged and play worse with each successive challenge, moving from first to second violin or from the top orchestra to a lower one.
Although the challenge process incentivized all student musicians to practice their music, its public nature and walk of shame to the lower seat could be humiliating and demoralizing to the “losers.” Fortunately, today, many youth orchestras have substituted the “seating audition” for head-to-head challenges.
Seating auditions are usually conducted in private, and unlike with challenges, everyone must do a seating audition. Usually, the conductor gives students scores based upon their performances. There are no winners and losers. Nor is there direct comparison of musicians or decision that one person played better than another.
After everyone’s audition, the conductor arranges the students in their sections. Instead of ranking students in exact order from the concertmaster to the last chair of second violin like the challenge method frequently did, students are placed to benefit the orchestra. For instance, the principal second violin, with significant responsibility as section leader, frequently is among the strongest players and likely had scored higher in their auditions than most of the first violinists.
Although musicians in youth orchestra understand their seats may change, tenants in commercial real estate usually expect their space in the building to remain the same for the term of their leases. However, sometimes that isn’t the case. Many commercial real estate leases contain tenant relocation provisions, which allow the landlord to require that the tenant move to different rental space.
This article is part of a series on Demystifying the Commercial Lease. Previous articles in the series discuss Types of Leases, Letters of Intent, Base Rent, and Common Area Maintenance Charges. This article discusses tenant relocation provisions.
What are Tenant Relocation Provisions?
Tenant relocation provisions are common in office leases. Some retail leases for shopping centers also include tenant relocation provisions. Landlords usually only request tenant relocation provisions for smaller tenants.
Large tenants have more bargaining power and won’t agree to a relocation provision. It’s also less likely that a landlord would have sufficient vacant contiguous space where it could move a larger tenant. It may be difficult for the landlord to find comparable, large spaces to relocate tenants. And, the cost to move a large tenant may be prohibitive, because there is and more space to build out and more furniture and supplies to move. It’s also more disruptive to the landlords, and the tenant’s, business to move a large tenant than it is to move a small one.
Although relocation provisions are common, it’s not common for landlords to actually ask a tenant to move. Tenants may “play the odds” that they won’t be asked to relocation and therefore, decide not to pay attention to those provisions when negotiating their leases. However, like so many “minor terms” in legal documents, the details in relocation provisions aren’t important – until they are. When triggered, a relocation provision can make–or break–a tenant’s business.
Why Landlords Want Relocation Provisions
Landlords want to relocate tenants when they can make more money by leasing the tenant’s space to someone else. Landlords will usually only move tenants to create a larger, contiguous space for another tenant. A larger, neighboring tenant may want to expand. Or a new tenant may require a space larger than the landlord has available without adding the tenant’s space to adjacent vacant space.
Usually, tenants don’t want the cost and disruption to their business a move would cause. And landlords usually will only move a tenant if the landlord’s cost of the move is less than the extra rent the landlord can make after moving the tenant. Therefore, when negotiating their leases, tenants should both try to minimize both the impact of a move on their own businesses and likelihood the landlord will relocate the tenants.
The lease should only allow the landlord can relocate the tenant for legitimate landlord business reasons. Most landlords will insist that they be able move a tenant if a larger, neighboring tenant wants to expand or if the tenant’s space is adjacent to vacant space which the landlord wants to combine with the tenant’s space to provide space for a larger tenant. Tenants should try to limit the landlord’s right to move the tenant for other reasons. The tenant should seek to prevent retaliatory relocations in response to a tenant complaint by requiring that the landlord have a legitimate business reason for the move.
When and Where the Landlord Can Move a Tenant
The lease also should say when and where the landlord can relocate the tenant. The relocation provision should require significant written notice, usually at least 60 to 90 days, before the relocation. This will help the tenant can carefully make plans to limit the move’s cost and business disruption.
Tenants may want to restrict the landlord’s ability to relocate them under certain lease conditions, such as during renewal negotiations or while the tenant has a right of first refusal on adjacent space. Tenants also may want to limit the number of times the landlord can move them during the lease term.
The landlord should only be able to move the tenant to comparable space in the building. Specifically, the condition, size and location of tenant’s new space after relocation should be comparable or better than the tenant’s original space. If the tenant’s space should be near to the elevator, have particular plumbing fixtures, or have a certain number of windows the lease should specify those requirements.
The new space also should have a tenant buildout that works for tenant’s building. The tenant improvements should be comparable in quality and condition to those in the tenant’s current space. If the tenant needs a certain number of offices or rooms, the lease should state that. The lease should require landlord to pay all costs of modifying the new space to meet the tenant’s needs.
The tenant may want to be able cancel the lease if it doesn’t want to move. The ability to cancel in the face of a move both enables a tenant to balance the economics of a move in the building with one to a different location. And the ability to cancel can balance landlord-tenant negotiations about a proposed move so the landlord doesn’t have inordinate bargaining power.
Paying for a Tenant Relocation
Leases typically require the landlord to pay the cost of relocating a tenant. However, leases vary in what they consider relocation costs. Some leases may only pay the cost of a moving company for the physical move.
Tenants should evaluate costs it might have besides a moving company and ask that the lease require the landlord to cover those costs, also. Those costs might include:
Furniture and equipment installation charges
Costs of packing and unpacking records and supplies
Ethernet and telephone wiring and equipment installation
New stationery, business cards, and advertising materials
New signage
Updates to websites, social media, and similar accounts
Notices to tenants and vendors about the new address
Utility transfer and hookup costs
Costs of staff overtime associated with the move
The tenant should not pay more rent if the landlord moves the tenant to larger or more desirable space. However, if the tenant’s new space is smaller or in a less desirable location, the lease should provide for a rent reduction.
Know What to Expect
Student musicians usually know that their seat can change, and they have some control over the change. Musicians can practice hard and learn their music well to minimize the likelihood of an undesirable change. However, once a lease is signed, tenants frequently have little control over when and where they may be moved.
The only time a tenant has control over their fate is during lease negotiations. Therefore, even though a move may seem unlikely, tenants still should carefully review and negotiate relocation provisions. Smaller tenants may not be able to avoid relocation provisions. But, with care and planning before signing a lease, tenants can minimize a relocation’s cost and disruption to their businesses.
© 2020 by Elizabeth A. Whitman
Any references clients and their legal situations have been modified to protect client confidentiality
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