Why You Need to Avoid Relocation Clauses in Your Restaurant Lease
Your stomach clenches up like a vice as you read the landlord’s letter to exercise the relocation clauses in the lease agreement.
The landlord is going to relocate your restaurant to the rear of the shopping center.
How can this be happening?
Finding the perfect spot for your restaurant was not easy. But after months and months of searching, you nailed down a great location with excellent street visibility.
The dust from construction is gone and business is booming.
This is not a fantasy. Many shopping center leases include Relocation Clauses.
What is a Relocation Clause?
In short, relocation clauses provides the landlord the right to relocate a tenant to a different space within a shopping center.
Why Would a Landlord Relocate a Tenant?
There are many reasons a landlord may choose to relocate a tenant. In most cases, the landlord needs to combine two or more adjoining spaces for a larger tenant or provide expansion space to an existing tenant.
Why Relocation Clauses are Risky for Restaurant Operators
The specific location within a shopping center is often critical to the success of a restaurant operator.
If you rely on visibility from passing cars, for example, relocation to the rear of the shopping center with little or no street visibility can dramatically impact your sales.
The other big concern, of course, is the amount of money invested to build a restaurant compared to a retail store.
In some situations, your investment is at risk if the landlord is not required to pay the entire cost of relocation including the build-out or if the landlord has the right to terminate your restaurant lease.
How to Protect Yourself from Relocation Clauses
If you are negotiating with a major shopping center owner you may not be able to remove the relocation right of the landlord from the lease. But in many cases, you should be able to add some provisions that will greatly reduce your risk.
It’s All in the Details
Protect Your Visibility
If you selected a space in a shopping center based on visibility, identify in advance which spaces within the shopping center would be acceptable in the case of relocation. These spaces should be identified on a site plan and included as an exhibit to the lease.
Protect your Investment
Restaurant build-outs are expensive. If the landlord has the right to relocate your business, the landlord should pay 100% of the cost to build and relocate your business.
Make sure this includes all costs such as permits and architectural fees. In the event you need to close your restaurant during the relocation, you should be reimbursed for lost sales.
Like for Like
You should not be forced to reduce the size of your restaurant, the number of seats, or incur increased expenses.
Insist that in no case shall the size and dimensions of the space be reduced and the rent and common area fees shall remain the same in the event the landlord wants to provide a larger space.
This sample clause allows the landlord to change the size and rent
“The substituted premises shall contain an area not less than eighty percent (80%) or greater than one hundred twenty percent (120%) times the square footage of the initial Premises, with a pro-rata adjustment to Minimum Rent and Additional Rent as a result of the increase or decrease in the size of the substituted Premises” This could result in 20% higher occupancy costs or space 20% too small for your restaurant.”
Avoid Termination Rights
Some lease agreements provide the right for the landlord to terminate your lease and recapture the space. This would be devastating if you have not recaptured your investment. If the landlord insists on this right, negotiate a termination fee large enough to recoup your investment and the value of your business.
This language allows the landlord to terminate the lease by paying a pittance of the business’s value.
“Landlord shall have the right to terminate this Lease by thirty (30) days’ written notice to Tenant, in which event this Lease shall terminate, Landlord shall pay to Tenant a termination fee equal to three (3) months of Minimum Rent, and the parties shall have no further obligations to the other under this Lease.”
Unfortunately, if you want to lease space in a large shopping center, unless you are a major anchor tenant, the landlord will not agree to allow you to control how they configure and operate the center in the future.
If you negotiate the terms above, your risk of relocation should be minimized and the chances of the landlord investing the capital required will further reduce the risk of relocation.
Lease agreements are complicated legal documents. Please seek the advice of an experienced restaurant real estate advisor and real estate attorney.