What’s this paragraph about substitute premises?
Commercial leases typically contain a provision allowing the landlord to move tenants from one location within a project to another in order to accommodate a larger tenant should contiguous space become available during the lease term.
No tenant — whether office, retail or industrial — should casually accept this provision provided the tenant has the bargaining power to have the language removed from the lease form. While it may not be practical for smaller tenants to attain this concession, the location of the space within the project was likely a key factor in the selection of the space and an essential element in the negotiation of the transaction. In an office lease situation, there can be several key critical issues that will affect the tenant’s reluctance to agree to this provision. These include views, access, visibility, proximity to noise-producing elements, foot traffic, proximity to competitors, and heating, ventilating, and air conditioning (HVAC) issues to name just a few.
From an economic perspective, the building owner has a compelling interest to keep the relocation provision or substitute premises language in the lease document. The cost burden associated with relocating a tenant within a project falls on the landlord as most all lease forms are drafted. As a result, the landlord will only want to invoke this provision provided there is sufficient economic incentive to do so — for example, if there is an office tenant who occupies 5,000 square feet of a floor and the remainder of the floor becomes available. Should the landlord have a prospective tenant in hand for 20,000 square feet (full floor) but can’t make the deal because the landlord can’t relocate the smaller 5,000 square foot tenant somewhere else within the project, then it is lost income and a bitter pill to swallow. As a result the landlord wants to maintain as much leasing flexibility as possible.
Mechanics of the relocation provision
In reality, the relocation of tenants to substitute premises within a project is not a common event. However, it does happen from time to time. And if the reality of a tenant’s bargaining power entails accepting the relocation provision in the lease negotiation, then the tenant will want to ensure that a number of details are spelled out in the lease language:
- All of the costs of the move will be paid by the landlord. This includes leasehold improvements, IT infrastructure, special equipment relocation and the costs to replace stationery and marketing collateral.
- The substitute premises should be of similar size and quality, and the tenant should not incur any rental increases by accepting a larger space.
In addition, you may want to request the right to cancel the lease as an insurance policy if acceptable substitute premises are not available, paving the way for a successful buyout negotiation.
Often in this scenario of a substitute premises I have seen landlords make the proposition attractive by offering a slightly larger space with no rent increase and upgrade the leasehold improvements, as well as cover all the related moving expenses. The best practice, of course, is to negotiate having the provision removed from the lease. The danger is accepting broad general language if the provision should remain in the lease. As a result of carefully crafting detailed language and narrowly defining what is acceptable substitute premises, this scenario can often turn into a positive result and mitigate the inconvenience of having to relocate in the middle of your lease term.
Coy Davidson is Senior Vice President of Colliers International in Houston. He publishes The Tenant Advisor blog.