In a commercial lease, termination options and relocation provisions are fairly common clauses that can have a major impact on landlords and tenants.
A termination clause in a commercial lease is an option for one of the parties to terminate the agreement. Typically, it’s the tenant with the option to terminate the lease, and there’s often a fee required to exercise the option as well as a notice period.
In general, it’s obviously not in the landlord’s best interest for the tenant to vacate and stop paying rent, so it’s usually not an ideal outcome for the tenant to terminate their agreement. However, there are times when a termination option is absolutely necessary for the tenant, and if the landlord wants their occupancy badly enough, they’ll grant the tenant’s request for this clause.
A fairly standard scenario involving a termination option would be a business with a large government contract on which they rely for survival. If the government has the ability to cancel their contract at a certain point in time, the tenant will naturally want to have the option to simultaneously terminate their lease.
The landlord may begrudgingly provide this option, but require, say, six months’ notice to terminate as well as a $100,000 termination fee to cover some of their re-leasing costs.
On the flip side, a fairly common landlord-friendly clause in a commercial lease is a relocation provision (or substitution space clause) allowing the landlord to move the tenant from one space to another, usually within the same property.
While it’s typically stipulated that the landlord pay the tenant’s moving costs, it’s still a big disruption to the business and not an ideal outcome. These options are rarely exercised given the costs involved, but they usually make sense for the landlord when a large tenant wants the smaller tenant’s space.
For example, if a shopping center has a 22,000 sq. ft. vacant space adjacent to a 3,000 sq. ft. space occupied by a small retailer with a relocation provision in their lease, and a large anchor tenant like Whole Foods is seeking a minimum of 25,000 sq. ft., the landlord will likely want to exercise their ability to relocate the small retailer to accommodate Whole Foods.
If you can avoid having a relocation clause in your lease, you should.
If it’s a deal-breaker for the landlord, you can’t offer anything in return to get them to reconsider (e.g. longer lease term), and you still want the space, you should at least require a significant notice period and specify the characteristics of the potential substitution space to ensure it’s as desirable as the space it’s replacing.