Relocation Clause & Substitution Space in Commercial Leases

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Depending on the size of your space in most Austin commercial real estate leases landlords try to incorporate some sort of relocation clause. You will also see this referred to as a Substitution Space clause. The reason why they ask for this is because they want to maintain control of the building space in the event they need to accommodate a larger existing tenant or prospective tenant that needs a larger amount of space than you. It’s vary rare that a relocation clause is exercised because it can be very expensive for them to do so. You typically only see them exercise this option when they have a large tenant opportunity that is willing to sign a long term lease.

A relocation clause is not convenient for a tenant, and could be very costly if not negotiated properly, especially if that tenant has invested a lot of their own money improving the space. If you are a small tenant you may not have the leverage to negotiate the removal of this, however there are ways to make it harder and more costly for the landlord to do this. If you are a large tenant and/or have invested a ton of money into your space or the cost of downtime could significantly impact your business then you definitely want to negotiate hard on this. 

What Does a Commercial Lease Relocation Clause Mean?

A relocation clause basically gives the landlord the right to relocate your company to another (substitute) space within the building.

For example say you rent 2,000 sf on the first floor of a building and there is 10,000 sf adjacent to your space that is available for rent. A prospective tenant comes along and needs to lease 12,000 sf. A landlord wants to make that deal. Having a 10,000 sf tenant is worth a lot more money than a 2,000 sf tenant. If you have relocation clause in your lease then the landlord has the ability to relocate your space to another available space in the building so they can make the deal with the larger tenant.

What do Commercial Substitution Space Clauses Look Like?

Below are just two examples of the type of relocation clauses and substitute space language that you will typically see in a commercial lease. Some are much longer and more detailed.

EXAMPLE #1

RELOCATION. Landlord shall have the option to relocate Tenant to alternative space in the Building (the “Relocation Premises”), which Relocation Premises shall be of comparable size or larger to the Premises. Landlord shall give Tenant not less than ninety (90) days prior written notice of such relocation, which notice shall include the date on which Tenant shall be required to relocate or move and a description of the Relocation Premises to which Tenant will be relocated. Landlord shall pay all out-of-pocket costs and expenses incurred by Tenant as a direct result of such relocation (including the cost of preparing the Relocation Premises for occupancy), provided, Tenant must furnish to Landlord invoices, receipts or other evidence reasonably satisfactory to Landlord relating to such out-of-pocket expenses. In the event of such relocation, the Relocation Premises shall for all purposes be deemed the Premises hereunder and this Lease shall continue in full force and effect without any change in the other terms or conditions hereof.

EXAMPLE #2

SUBSTITUTION SPACE. Landlord may, at Landlord’s expense, relocate Tenant within the Building to space which is comparable in size, utility and condition to the Premises. If the Landlord chooses to relocate Tenant, Landlord shall reimburse Tenant for Tenant’s out-of-pocket expenses for moving Tenant’s furniture, equipment, and supplies from the Premises to the relocation space and for reprinting Tenant’s stationery of the same quality and quantity as Tenant’s stationery supply on hand immediately before Landlord’s notice to Tenant of the exercise of this relocation right. Upon such relocation, the relocation space shall be deemed to be the Premises and the terms of this Lease shall remain in full force and shall apply to the relocation space.

How Can I Minimize Landlords Control of Relocation Clause?

When negotiating the commercial lease contract your initial attempt should be to have the relocation clause removed altogether. However if you are a small tenant and/or signing a short term lease you will have a hard time getting the landlord to agree to the removal of the substitution space clause. 

If the landlord just absolutely will not agree to removing it then incorporate some language into the paragraph that will ensure the landlord gives you plenty of notice and that the substitution space is the same or better than your existing space. For example you want the same number of windowed offices, same finishes, etc. Also if the substitution space is larger than your existing space you don’t want to have to pay more rent than you do now. In the event that the landlord cannot provide space that meets your needs or if no other space is available in the building then you want the ability to terminate the lease.

Below is some example language that would protect a tenant in the event a landlord will not agree to removing the relocation clause.

RELOCATION. Landlord reserves the right, privilege and option to relocate Tenant, not more than once during the Term, upon one hundred twenty (120) days’ prior written notice, from all or part of the Premises (herein referred to as the “Old Premises”) to another area in the Project (herein referred to as the “New Premises”), provided that:

(a) The net usable area of the New Premises must be at least equal to the net usable area of the Old Premises and, in any event, if the New space is larger than the Old Premises the rent payable by Tenant hereunder with respect to the New Premises shall not exceed that required with respect to the Old Premises;

(b) The New Premises shall be substantially the same in configuration, number of windows, decor, interior improvements and nature as that of the Old Premises, and all reasonable effort shall be made by Landlord at Landlord’s cost to place the New Premises in such condition; and

© Landlord pays the cost of moving Tenant and improving the New Premises to a standard comparable to the Old Premises, including, without limitation, the cost of recabling and rewiring Tenant’s data and communication systems, replacement of reasonable quantities of stationery on hand and all labor and product costs associated therewith. Tenant shall cooperate with Landlord in all reasonable ways to facilitate the move, including supervising the movement of files or fragile equipment, designating new locations for furniture, equipment and new telephone and electrical outlets, and determining the color of paint in the New Premises.

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