Drafting Relocation Provisions in Commercial Leases
While the California Supreme Court has held that a party to a contract can intentionally breach that contract and be responsible for only contract damages (Applied Equipment Corp. v. Litton Saudi Arabia Ltd.), a commercial landlord does not have that luxury. A lease is not only a contract, but is also a conveyance of a real property interest . A landlord, then, cannot stop its tenant from possessing the leased premises unless that landlord obtains a court order allowing it to do so. In other words, the landlord does not have the remedy of “self-help.”
What, then, is the landlord to do in order to give itself the flexibility it needs in the event its future plans include selling or developing the property? Or, if the commercial landlord is the owner of a mall or shopping center, how can it keep some flexibility to expand or add new anchor tenants, or to achieve full occupancy by juggling the tenants? Landlords have been relying on “relocation” or “substitution” provisions in commercial leases to give themselves such flexibility. “Relocation” or “substitution” provisions allow the landlord to move the tenant within the office building or shopping center to a new location or, sometimes, even outside the location.
To date, there have not been any reported cases in California as to the enforceability of relocation provisions. However, generally, California courts hold that commercial leases are a matter of private contract between the landlord and the tenant with which the general public is not concerned (Burnett v. Chimney Sweep). And, a provision in a commercial lease will not be disturbed unless it is contrary to public policy (Ilkhchooyi v. Best). Therefore, it is likely that such a provision would be, in general, enforceable in this State.
The question then becomes what about the details of such a provision? Judging from the few available non-California decisions, the more specific the details, the better. One such provision construed by a court provided:
Notwithstanding anything to the contrary contained in this Lease, Landlord on forty-five (45) days’ written notice to Tenant, shall have the right to relocate Tenant’s Premises within Landlord’s Building at Landlord’s reasonable costs and expense (Take Me Home, Inc. dba Mostly Mardi Gras v. New York Life Insurance Co.).
The provision provided little other than the notice required to be given by the landlord, and that the landlord is to pay “reasonable costs and expenses” to accomplish the relocation. Not surprisingly, the court held that the landlord’s right to relocate the tenant is “not a boundless one.” The court held the provision must be interpreted to require comparable and reasonable alternative premises. In a test by another tenant of that same provision, a different court referred to the particular State’s statute which provided that a landlord must “deliver and maintain leased premises in a condition suitable for its intended use.” Because the intended space was suitable for the tenant’s retail needs, the court found that the tenant’s refusal to relocate was wrongful and ordered the tenant evicted (New Orleans Hat Attack, Inc. v. New York Life Insurance Co.).
Similarly, in Kite v. Kaplan, Inc., a similar bare-bones relocation provision was at play: “ All of the mentioned store space, and reserve stock space is located in the store of lessor, and may be changed from time to time by lessor at its option and expense.” In a gentle rebuke to the tenant, the court held that “It is unfortunate for [tenant] that the lease contract did not contain further provisions for his protection, but the Court cannot read into the contract words that are not there.” Still, the court found that the provision had to be read to consider the reason for the contract, in this case, the leasing of space for a jewelry department, with respect to the location, the size of the space, the style and shape of the showcases, and other factors. “In other words, the new facility must be truly comparable, although not necessarily identical in detail.” Further, the court held that relocation could only be required once the new space has been made reasonably comparable, at the lessor’s expense.
What do these court decisions teach? That the ability of a landlord to relocate a tenant is not “boundless.” That the court reviewing the relocation provision is likely to hold that the landlord has the duty to act in good faith and deal fairly with the tenant. That the court may look to the “permitted use” provision of the lease to see if the new location can support that use. And, that the landlord should provide as much detail as possible in that relocation provision so as to avoid a court either finding the provision unenforceable or adding provisions which the landlord would like to avoid. Here are some of the issues the landlord should consider in drafting its relocation provision:
- Right to Relocate. Does the landlord have the absolute right to relocate, or must there be a particular event that triggers that right, such as the addition or deletion of an anchor tenant or an expansion of the center? Further, must the triggering event be in proximity to the to-be-relocated tenant?
- Notice to the Tenant. How much time does the landlord need to give to the tenant? Can the relocation occur at any time or is it limited to avoid certain “busy times” of the tenant such as holidays, back-to-school or the taking of inventory? Is the notice of the landlord’s “intent” to relocate or of the relocation itself?
- Location and Layout for the New Premises. Will the landlord have the sole discretion to choose a location or will the location be in a particular location (e.g., next to an anchor tenant, on a particular level of a mall, etc.)? Will the new premises be the same size and the same set-up as the current space? Be careful here as using phrases such as “comparable in size and location” may create ambiguity.
- Who Pays? Will the landlord pay for the moving expenses and the requisite renovations needed to enable the tenant to move into the new premises, will the tenant pay, or will the parties share in the costs? Describe whether and to what extent the landlord will reimburse the tenant for any losses caused by the relocation.
- Remedies. If the tenant refuses to relocate, will the landlord have an additional remedy that it can terminate the lease?
- How Often Can the Landlord Relocate the Tenant? Does the landlord have an unlimited right to relocate in terms of the number of times it does so for a particular tenant?
Relocation provisions are a helpful tool to give the landlord flexibility. However, they should not be considered “boilerplate,” and should be drafted with care to avoid or limit disputes later on.
About the Author: Jeffrey N. Brown is a litigation partner specializing in complex real estate litigation at Pircher, Nichols & Meeks, a law firm that represents real estate clients nationwide through its offices in Los Angeles and Chicago.