You’re a professional. You’ve been trained to understand what your client needs. And you know how to find the best real estate. You and your client are excited, you sign the offers and then close the deal.
What you may not know is that you’ve made a big mistake. The lease your client just signed will ruin their business and they’ll blame you.
This happens frequently when negotiating and signing offers because, although legal advice is advisable, it isn’t practical. Lawyers give complex, lengthy and expensive analysis and slow the deal process. As a lawyer who built and led a leasing department for a private equity real estate investment firm, I saw how lawyers would frustrate everyone; yet, without legal advice major consequences would follow.
Since a lawyer may not be readily available, it’s best to arm yourself with knowledge and think like a lawyer. Thinking like a lawyer is easy – be paranoid and always think of the worst-case scenario!
The knowledge part, however, can be more cumbersome. So, we’ll start with one clause at a time, beginning with the most frequently overlooked but potentially dangerous clause.
The relocation clause
Your client is a hairdresser and her business depends on walk-ins. She needs foot traffic generated by pedestrian roads and “name brand” tenants.
You find her the perfect unit. It’s right beside a popular café and faces a busy sidewalk. You sign the offer, but pay no attention to the lease attached to the offer. After all, the terms look fairly standard and you got your tenant a great rental rate.
Three months later the landlord says she is being relocated to the back of building where there is no foot traffic and where there are no “feeder tenants”. After four months, she loses her business and you lose a client.
What happened? You didn’t see the Landlord’s Right to Relocate clause, which stands on its own or can be buried in the Control of Building by Landlord clause.
What is this clause and why does the landlord want it? The landlord will typically want to retain a lot of rights in its maintenance, management and operation of the building. Moving a tenant is central to a landlord’s management of the tenant mix and its ability to make changes to the building. For example, the landlord may want to attract another tenant or demolish the unit to create a larger space for an existing tenant. Given these objectives, watch out for wording that says:
“Landlord has the right, on no less than 60 days’ notice, to relocate tenant (including its subtenants and all other permitted occupants) to other space in the centre designed by landlord of comparable size in which the tenant must complete the relocation within 30 days after the landlord’s notice. The new premises replaces the old for all purposes of the lease.
“In the event of relocation, the landlord will pay to the tenant on an equitable basis, for capital costs incurred by tenant for new trade fixtures as a direct result of such relocation.”
Let’s consider our earlier hairdresser scenario. This clause gives the landlord the right to move your client with only 60 days notice. Your client has only 30 days to move, which will completely disrupt her business. The landlord, however, has no obligation to reimburse your tenant for this inconvenience. The landlord only has to pay your client her costs to change the fixtures in the new unit and nothing else. She doesn’t get reimbursed for her loss of business income, her moving costs or her marketing costs letting her clients know about the move.
What should you do? If you’re representing the tenant, make sure that you strike out this clause completely. If the landlord has more bargaining power than you, insist that your client be provided a “turn-key” premises in a comparable location, size, configuration and of comparable accessibility. If your hairdresser client had this wording, she would have been moved to another unit that provided the same foot traffic and feeder tenants that her old unit provided.
You should also make sure your client is reimbursed for any loss of business income, goodwill or other profits because of the relocation. If the landlord disagrees with subsidizing these costs, request that any relocation will only occur if your client agrees to the relocation in writing. The client should also request that all costs, including but not limited to leasehold improvements and moving costs, be reimbursed as a result of the relocation.
This article offers general comments and is not intended to provide legal opinions. Readers should seek professional legal advice on the particular issues that concern.