Set Criteria When Giving Relocation Space to Tenant

Many retail space owners, and especially mall owners, give themselves a relocation right. That is, the right to relocate the tenant to a different space in the center or mall under certain circumstances. Negotiating a relocation right can be tricky—if you don’t draft this provision correctly you could end up thwarting your own efforts to have some flexibility. Using vague terms is the quickest way to negate your intent for the provisions. For example, using the term “reasonably acceptable” to describe how the tenant must feel about its new location is so vague that it could end up making your right to relocate it worthless. The tenant could refuse to agree that any space you try to move it to is reasonably acceptable. Claims that the proposed relocation space is located in a lightly trafficked part of the center and therefore isn’t “reasonably acceptable” could lead to getting a court to decide whether the tenant is being unreasonable. In the meantime, you may lose the new tenant you intended to put in the tenant’s original space because it may not want to wait for the outcome.

When writing your relocation clause, give yourself the right to relocate the tenant to a space that meets certain objective criteria. Then, if the space meets these criteria, the tenant can’t claim that the space is unacceptable.

Get Into Specifics

Here’s a list of likely criteria for a relocation space that we’ve included in our Model Lease Clause: Use Specific Terms in Relocation Clause. You may need to adjust this list depending on the specifics of your building or center:

Minimum amount of space. You may not have a relocation space that’s exactly the same size and configuration as the tenant’s original space. To protect yourself, state that the size and configuration of the space will be determined solely by you. But the tenant may be concerned about getting stuck with a relocation space that’s too small. That’s a fair concern. After all, the tenant may have a tough time using a smaller space for its business. So agree that the space won’t be smaller than a minimum amount of rentable square feet [Clause, par. a(i)]. You’ll need to negotiate the minimum square footage with the tenant.

Example: The tenant’s current space is 10,000 rentable square feet. You may agree in the relocation clause that the relocation space won’t be smaller than 9,000 rentable square feet.

The tenant may also want to set a maximum size for the relocation space so that the space is no bigger than a certain number of rentable square feet. There’s nothing wrong with setting a maximum if you must, as long as you give yourself as much flexibility as possible. For example, if the tenant’s space is 10,000 square feet, set the maximum at 12,000 square feet [Clause, par. a(i), optional].

Rent increase cap. If the tenant’s rent or any other lease costs, such as operating expenses, are calculated based on the size of the tenant’s space, you’ll want to adjust this amount when the relocation space is a different size [Clause, par. a(ii)].

If the relocation space is bigger than the original space, the tenant’s rent and other lease costs would increase. Expect a tenant to balk here. It will argue that it shouldn’t have to pay a higher rent because you’ve relocated it. After all, it didn’t demand the bigger space.

As a compromise, you can agree to put a cap on any increase in rent or other charges that will result if the relocation space is bigger than the tenant’s original space; in other words, the rent and other charges won’t increase by more than a set percentage [Clause, par. a(ii), optional]. Start out demanding an increase of up to 20 percent over the costs for the original space just before the relocation. But expect to negotiate this. You may have to settle on a 5 percent or 10 percent cap.

Example: The rent for the original space is $200,000 based on 10,000 rentable square feet at $20 per square foot (assume no other charges). You agree that any rent increase for the relocation space will be capped at 10 percent of the rent in the original space. The relocation space is 12,000 square feet. Without the cap, the rent would increase to $240,000 (12,000 x $20). But the cap sets the increase at $220,000 (200,000 x 10% = $20,000; $200,000 +$20,000).

The tenant will probably demand assurance that you won’t suddenly begin to charge it the full uncapped rent a year or two after the relocation. You can agree in the lease that the cap will continue for the life of the lease.

Relocation space within zone. Ideally, you’ll want to be able to relocate the tenant to any available space in the building. But the tenant, especially a retail tenant, may fear that you’ll relocate it to a less desirable area. For example, a retailer located near the entrance to a large department store won’t want to be relocated to a space in a wing of the center that’s only half occupied. Your office tenant may be concerned, too. An office tenant with a bright space overlooking the park won’t want to relocate to a dark space facing the back of another building.

To solve this problem, agree that you’ll relocate the tenant only to a space within a set area of the building or center—called the “relocation zone.” Then give yourself free rein to relocate the tenant anywhere within this zone [Clause, par. a(iii)]. If you have a shopping center or office park and can build additional buildings in the future, you may want this relocation right to cover any present or future buildings within the zone [Clause, par. a(iii), optional].

Reasonable equivalent improvements. Should you be able to relocate the tenant to an unfinished space—without any improvements? A tenant will probably say no, arguing that the relocation space should be delivered to the tenant in the same condition as the original space.

If you give in to the tenant here, agree only that the improvements in the relocation space will be reasonably equivalent in quality to those in the original space [Clause, par. a(iv)].

Expect Additional Criteria

Some tenants may demand other criteria related to their business or space:

No move during tenant’s busy season. A tenant with a seasonal business may want you to agree that you won’t relocate it during its busy season. For example, a retailer won’t want to move during November or December. And an accounting firm won’t want to move from January through April.

Same number of windows. An office tenant may demand that the relocation space have the same number of windows or windowed offices as the original space.

Similar configuration. A tenant may demand that the configuration of the relocation space be similar to that of the original space. The fact that both spaces are roughly the same size may not be good enough. A long narrow relocation space may not work for a tenant that’s currently in a square space.

Save Option to Terminate Lease

What if the tenant refuses to relocate after these criteria are met? You may lose your new tenant if you can’t get this tenant out of the space. So make sure you say that the tenant’s violation of this relocation clause shall constitute a “material” default. And give yourself the right to immediately take advantage of all remedies available to you under the law.