Avoiding Office Leasing Landmines in the Space Selection Process
I recently had a client reach out to let me know that their landlord had contacted them about relocating my client within the building. To be candid, I panicked for a few seconds because this client had recently signed their new lease only a few months earlier. Additionally, they are a new client and they are one of the smaller tenants in the building.
That small footprint is the main reason I panicked. We do our best at Keyser to negotiate landlord relocation rights completely out of our clients’ leases, but in the moment I took the call I didn’t remember if I had successfully eliminated that landlord right from the lease for my client. Typically, the smaller the tenant the harder it is to get rid of that relocation clause because landlords want the flexibility to move around smaller tenants in case they need to accommodate a new large tenant or expand an existing large tenant.
Fortunately, as I was pulling up the lease, he reminded me that we had successfully secured the elimination from the lease that the tenant could not be unilaterally relocated by the landlord. Boy was I relieved!
It remains to be seen if the landlord is going to ask my client to move so that two of the largest tenants in the building can expand. If the landlord does ask, my client holds all the leverage. My client, not the landlord, will decide if they are going to relocate and, if so, my client will be able to determine what will be the appropriate compensation.
Why Do Landlords Relocate Tenants?
Short answer: Money! $$$$. The landlord needs relocation rights to maximize revenues for the building or project. This scenario occurs frequently in a newly completed building or one that is under construction and pre-leasing space. Having the ability to move a smaller tenant to another area on the same floor or to another floor in order to accommodate a larger tenant is ideal for landlords in securing tenants that may need a full floor or prefer a certain area of the building.
In an established building that is fully leased, or nearly fully leased, landlords still try to obtain these rights with their tenants in order to have flexibility in their space management strategy going forward. As leases roll and some tenants grow and some tenants shrink and some relocate, landlords can consolidate large blocks of space or even full floors to attract larger users or accommodate expansion plans of larger existing tenants by relocating smaller tenants.
Space Analysis Due Diligence
Obviously eliminating the possibility of a unilateral landlord right to relocate a tenant is the prudent and advised route to take. However, in the trenches of engaging and creating leverage in the open market of office leasing, size, tenant credit, and number of options for the tenant are the determining factors of eliminating such a threatening clause. Often times if one of those levers is not aligned, this exposure is a reality for tenants.
The landmine referred to is two-fold: the first aspect is that when evaluating building and space options in the market, proper weight should be given to the due diligence and qualitative analysis in deciding on a short list of buildings to engage in negotiations and eventually choose to move into.
A tenant broker should make their client aware of this potential landmine and weigh the likelihood of a relocation with those short-listed properties. In order to accurately assess the risk of a relocation, a tenant broker must analyze many factors including, but not limited to:
- Tenant mix – how is the building stacked? Are there a bunch of small tenants adjacent to the space under consideration or is it next to one or two large tenants on the same floor?
- Existing expansion rights — this plays into the above bullet point: what existing tenants have rights that could affect the space under consideration?
- The position of your company’s potential premises within the building — how easy would it be for the landlord to relocate your company to comparable space?
- Building vacancy – Does the landlord have plenty of options to lease other tenants of various sizes space in the project?
- Lease Expiration Schedule – How soon are the neighboring Tenants going to be forced to make decisions about their space that could start a domino effect, which could then affect the space of interest?
- Market activity – Is the building or project swinging a hot bat? Or in a hot submarket? And how does that interplay with the other factors discussed above?
No one can predict the future accurately, but all of these factors and more interplay with each other and are influential on the chances a landlord may decide to invoke a relocation right with a tenant. These must be taken into consideration when picking a shortlist of buildings to move into, as well as awarding the final choice for your company’s tenancy.
The second aspect of the landmine is how to best negotiate lease language that will best mitigate a relocation from being painful and disruptive if exposure to this potential scenario is unavoidable in their building of choice. I’ll cover this in my next blog. Love and Light!
Keyser is a world class commercial real estate and business advisory firm exclusively serving tenants/end-users across all industries and is headquartered in Phoenix, Arizona.
Darius Green is an associate broker and founding member of Keyser. Darius advises and represents clients locally and nationally across industries in every stage of the real estate process including lease renewals, relocations, consolidations, subleases, acquisitions, dispositions, strategic planning, demographic and site consulting, and lease portfolio management. Darius is a Fiesta Bowl Committee member and a graduate of both the Sandra Day O’Connor College of Law and Northwestern University.