Why Was This Relocation Clause Unenforceable?

Every time you lease space to a tenant, you incur opportunity costs to the extent a more desirable tenant in need of that same space turns up later. That’s why clauses allowing you to relocate tenants to comparable space within the shopping center or building can be extremely valuable. Relocation clauses also give you the flexibility you need to carry out property-wide renovations and maintain the optimal tenant mix. However, like any other lease provision, a relocation clause can blow up in your face if it’s not properly drafted. And because tenants are apt to resist being moved from their chosen location during the lease term, flaws in relocation clauses can be particularly costly.

SITUATION

A Connecticut shopping center landlord recently learned this lesson the hard way. With long-term plans to redevelop the mall, the landlord made it a point to include relocation clauses in leases with a restaurant tenant in an area slated for new construction. The clause also gave the landlord the right to terminate the tenant for refusing relocation to substitute premises of comparable square footage.  

The redevelopment plan called for razing one building, constructing a new one in its place, moving an existing tenant into the new building and then razing the building that the tenant had previously occupied. After securing zoning approval for the plan, the landlord exercised its relocation rights and ordered the tenant to move to a new, comparable space in the new building, which was still under construction. Along with such notification, the landlord gave the tenant plans showing the location of the new space.

But the tenant didn’t want to move or even negotiate moving. So, the landlord sued to evict it for breaching its lease duty to accept the relocation to the substitute premises. The lower court sided with the landlord and ruled that the tenant violated the relocation clause. The tenant’s failure to negotiate the relocation in good faith was essentially a refusal to relocate giving the landlord the right to terminate.

Unfortunately for the landlord, the victory proved to be short-lived when the Connecticut appeals court found that the lower court ruling was “clearly erroneous” and reversed it.

WHAT’S WRONG WITH THIS RELOCATION CLAUSE?

The key to the appeals court ruling was how the relocation clause was drafted. Here’s the actual language. Your assignment: See if you can figure out why the court ruled that the tenant’s refusal to relocate wasn’t a breach of the clause giving the landlord the right to evict.

Landlord may, at its option, before or after the Commencement Date, and during any option renewal period. . . elect by notice to Tenant to require Tenant to vacate and surrender the Demised Premises, and to substitute for the Demised Premises other reasonably similar space elsewhere in the Shopping Center (the ‘Substitute Premises’) designated by Landlord (provided that the Substitute Premises contains at least the same square foot area as the Demised Premises) and to move the Tenant to the Substitute Space. . . .Tenant shall vacate and surrender the Demised Premises and shall occupy the Substitute Premises promptly. . . Should Tenant refuse to relocate to the Substitute Space, Landlord may, at its option, by notice to Tenant, elect to terminate this Lease, which such termination shall be effective thirty (30) days after the date of such termination notice.

ANSWER

The fatal flaw, from the landlord’s perspective, was the second sentence stating that the tenant “shall vacate and surrender the Demised Premises and shall occupy the Substitute Premises promptly” upon notification of the landlord’s exercise of its relocation option (emphasis added).

EXPLANATION & ANALYSIS

The clause didn’t say the tenant had to negotiate relocation; it said the tenant had to move to the substitute premises promptly upon receiving a valid notice of substitution from the landlord or face termination. The implication was that the substitute premises would actually be in existence at the time notice was given. “An interpretation to the contrary would render the ‘shall occupy the Substitute Premises promptly’ language superfluous,” according to the court, since it would be impossible for the restaurant “to vacate the demised premises and then occupy promptly a substitute premises that had not yet been constructed.”

In legal terms, the existence of a readily available substitute space was a “condition precedent,” or something that must exist or take place before there’s a right to performance. If the condition precedent to a lease duty isn’t fulfilled, the duty can’t be enforced [Noroton Heights Shopping Ctr. v. Phil’s Grill, 2021 Conn. App. LEXIS 299, 2021 WL 4024377].

3 TAKEAWAYS

There are three lessons to take from the Noroton Heights case:

1. Tenants who must relocate immediately need readily available substitute space. If your lease provides for immediate relocation into substitute space, the way the clause in Noroton Heights does, the condition precedent is that the substitute space will be ready upon or shortly after you notify the tenant that you’re exercising your relocation option. Failure to recognize this proved to be the landlord’s undoing.

One way to avoid this pitfall is to adopt more flexible lease language giving you the option, but not the obligation, to require the tenant to relocate immediately in case substitute space isn’t ready to go when you provide notification. Here’s some language you can adapt:

Model Lease Language

RELOCATION: Landlord shall have the option to relocate Tenant to alternative space in the Center/Building (the “Substitute Premises”), which shall be of comparable size or larger than the Premises. Landlord shall give Tenant not less than [insert #] days' prior written notice of such relocation, which notice shall include the date on which Tenant shall be required to relocate or move and a description of the Substitute Premises to which Tenant will be relocated. In the event of such relocation, the Substitute Premises shall for all purposes be deemed the Premises hereunder and this Lease shall continue in full force and effect without any change in the other terms or conditions hereof.

2. Relocation clause must be coordinated with construction plan. The broader moral is that relocation clauses must be not only carefully drafted but also coordinated with the long-term redevelopment or reorganization strategies they’re designed to promote. The lease in Noroton Heights didn’t sync up with the redevelopment plan to the extent that it required immediate relocation before suitable substitute space the tenant could occupy became available.

3. Relocation clauses may need adjustment. Redevelopment plans often change on the fly and you need to ensure that your current lease relocation language is suitable for the changes and new conditions. Although the facts aren’t 100 percent clear, we do know that in Noroton Heights the landlord’s redevelopment plans changed after the restaurant signed the lease. As a result, the relocation clause probably should have been revised as well. The disconnect likely became apparent only when the landlord sought to enforce the clause. This is something to bear in mind if your own leases include relocation clauses.