The Right to Relocate Commercial Tenants-A Must for Retail Center Redevelopment

August 27, 2024 | Author:  David J. Murphy

Developers are increasingly turning older traditional retail centers in suburban areas into new mixed-use properties. According to NAIOP, a commercial real estate development association, there are several trends that present new opportunities for developers to repurpose these traditional retail centers, including online retailing and demand for mixed-use spaces.

It is well-known that online retailing has disrupted businesses at physical locations, and this change has been particularly felt in suburban areas. According to U.S. Census data, e-commerce has dramatically altered the landscape of retail in the last two decades, with online sales growing from 0.63 percent of total retail sales in 1999 to 15.9 percent in the first quarter of 2024. And this trend is only increasing. By 2027, online sales are projected to grow to 23 percent of total sales.

As a result, many suburban retailers without significant online sales find themselves unable to compete, lose revenue, and ultimately close. For retail center owners, these closures mean losses of rental income and operating costs. With trends continuing to move toward online sales, retail center owners will continue to lose tenants and income.

However, developers and retail center owners can adapt to this changing landscape and take advantage of another trend, an increasing demand for mixed-use development in suburban areas. With more physical retail locations closing, those locations are attractive for mixed-use development.   They already function as destinations with visibility and foot traffic. And in most cases, the infrastructure supports mixed-use spaces that can function in redeveloping neighborhoods into desirable live-work-play communities.

NAIOP confirms that demand for mixed-use developments including residential, office, and retail uses is increasing. Mixed-use development offers a modern, adaptive solution that provides the convenience of retail, restaurants, and new and exciting entertainment in a residential community. Locals also welcome this new dynamic, saving them the hassle of traveling for such entertainment and dining options.

The Right to Relocate a Commercial Tenant

When a developer identifies an opportunity to develop a traditional retail center into a mixed-use community, it must have the flexibility to relocate existing tenants to other locations in order to accommodate the new development plan. By taking a few extra steps in the planning process, developers can avoid major headaches later down the line during development. Let’s break it down:

• During due diligence, the developer should review the existing leases to determine when the term of each lease expires, and if the lease contains options to extend the term of the lease.
• If any lease term ends or may be extended beyond the period the developer intends to develop the property, the lease should provide the right for the landlord to relocate the tenant to another space in the property after the property is redeveloped.
• If the lease does not provide a right for the landlord to relocate, the tenant may refuse to move or change its premises which can prevent or hold up the developer’s plans to redevelop the property.
• If prior to acquiring the property, the developer identifies any lease with a term that extends into the period the developer intends to develop the property, and that lease does not include an acceptable right to relocate the tenant, the developer should attempt to negotiate with the tenant prior to purchase to obtain an acceptable right to relocate provision in the lease as a contingency to the developer’s purchase.
• During negotiations to amend a lease to include a relocation provision, the tenant will usually bargain for a particular location in the redeveloped property. The tenant’s main concerns will likely be access, visibility, and proximity to an anchor tenant. Generally, the tenant wants a space that the tenant believes will be better than the premises originally leased to the tenant.
• The tenant will also be concerned with the timing of the redevelopment.
• The developer usually agrees to pay for all costs of relocation and preparing the new premises for the tenant’s occupancy.

A Case Study

Recently, we addressed the possibility of relocating a bank tenant to another area of a property to accommodate the redevelopment of the property to add national tenants and an apartment building. Our client desired to purchase a retail center, built in the 1980s, which included the bank as well as a restaurant, convenience store, pharmacy, dentist office, yoga studio, nail salon, and general office use.

During due diligence, we identified that the bank’s lease provided the bank with the option to extend the term of the lease for up to thirty years, well beyond the client’s planned development timeline. Because of the bank’s location, the lease prohibited the developer’s plans to redevelop the property.

After extensive negotiation, the developer and bank agreed to the following terms:

• If the developer decides to redevelop the retail center, the developer may relocate the tenant to another space in the retail center if the space:
  • is visible from the main street;
  • has signage visible from the main street;
  • has at least 20 linear feet of store frontage; and
  • will have no more than 4,000 rentable square feet and no less than 2,500 rentable square feet.
• The tenant will not pay a higher amount of basic annual rent than the amount the tenant is then paying at the time of relocation on a per-square-foot basis, which will be adjusted at the time of relocation.
• The tenant’s pro rata share of real estate taxes, insurance, and operating expenses will be adjusted at the time of relocation based on the rentable square footage of the new space.
• The developer is responsible for the cost of constructing, improving, and preparing the new space including tenant improvements and fixtures reasonably comparable to the old premises.
• The developer will make a reasonable, good-faith effort to coordinate with the tenant a plan as to the scope and timing of the relocation.
• The tenant will not be required to close for business in the old premises until the new premises is open for business.
• The parties execute an amendment to the lease which sets forth the new description of the premises and amendments consistent with these terms.
• The obligation to relocate is subject to the tenant’s receipt of the appropriate federal and state regulatory approvals for the operation of a branch in the new premises.
• If the tenant disputes the proposed space and does not meet the agreed-upon conditions, the developer and tenant will attempt to resolve the dispute in 30 days, and if unsuccessful, participate in a good faith informal, non-binding mediation.

As a result, the amendment to the bank’s lease incorporating the above terms permitted the developer the flexibility to relocate the bank, maintain the bank as a tenant during the developer’s proposed redevelopment of the retail center, and close on the purchase of the property. In the end, the parties were satisfied and developed a good working relationship negotiating a fair agreement.

Take Away

As opportunities to develop traditional retail centers into mixed-use communities increase, the ability to negotiate a satisfactory agreement to relocate tenants during the development process is essential to maintain good tenants and to streamline the development process.

If you have any questions, or if you are in need of an attorney to help with your real estate development matters, please contact us. We can help.

David J. Murphy is the managing attorney of the law firm of Murphy PC in Boston, Massachusetts.  He regularly represents developers in mixed-use development projects.