Retail shopping center growth has hit a big speed bump coming in to the 2017 New Year as increasing vacancy rates persist in many U.S. shopping centers. Big-box retailer Sports Authority announced in 2016 that it would close its 460 stores. Walmart likewise disclosed plans to close 269 stores. Macy’s reported that it would shutter 68 locations by the end of 2017 (and 30 additional stores over the next few years). Kohl’s, Sears and Kmart have similarly announced store closures. The effects of these big-box and anchor tenant closures reverberate throughout their retail centers: foot traffic to the centers decreases; the landlord loses a major source of income; and in some instances, these closures accelerate additional center vacancy by triggering co-tenancy provisions under other tenant leases. When that happens a remaining tenant’s rent will be reduced until a suitable replacement anchor tenant is found, or, even worse, if a replacement is not found after a period of time, the remaining tenant can terminate its lease altogether. How are retail shopping centers trying to re-position themselves in the wake of these closures? And how can the relocation provision of the lease help both landlord and tenant be a part of a more vibrant and profitable center?

There is a consensus in the development community: retail centers need to look to the future and think outside the (big) box! As the market for online shopping continues to grow, traditional brick-and-mortar stores are predictably feeling the heat with dwindling sales. In response, shopping centers are seeing some of these tenants—including their anchor tenants—shrink their store footprints, move to more favorable locations, or close their doors completely. Big-box stores are not immune from this trend, and, as a consequence, when one anchor tenant closes, it is not an easy task to find a replacement. The question then becomes: What does the owner of the center do with these large vacant units?

While A-list shopping centers generally have other tenants lined up that they can backfill into these empty spaces, the not-so-A-list centers are less fortunate. The lack of big-box credit worthy tenants is forcing many of these owners to think creatively about their tenant mix, considering not only the ever-changing tastes of their customers but also the millennials’ desire for a more urban experience. Now, retail customers want to enjoy an experience that complements the surrounding neighborhood. They want to be able to go somewhere where they can do it all: go to a yoga class, shop, have a drink or meal with friends, perhaps go to the physical therapist, and then maybe catch a movie (or maybe not go anywhere at all!—with their residence located within the center and only footstep away from these experiences).

With that in mind, developers and design consultants examining the changing landscape of malls have proposed potential ways to modify the traditional mall site with ideas such as introducing housing, incorporating a more varied mix of uses (e.g., office, hospitality, medical, and retail), creating green space (e.g., parks, lakes, trails), incorporating airport-connected transit, and even urban farming. Clearly, if a development will be new construction, these concepts are more easily taken into consideration during the development stages. An existing shopping center that loses a Macy’s or Sports Authority, however, will have to consider the tenants that are currently operating in the center. In order to accomplish any overhaul of the center, there will likely be a re-shuffling of the current leasing plan, which may require the potential relocation of some current tenants. For this reason, the relocation provision that is often “intentionally deleted” from a lease may be beneficial to both the landlord and tenant in revitalizing an aging and increasingly-vacant mall.

A standard relocation lease provision generally gives the landlord the right to relocate a tenant to a similarly-sized location with certain notice. Often the landlord will agree to pay relocation costs and expenses associated with preparing the new space (not including fixtures), with a rent adjustment depending on the increase or decrease of square footage of the space. From the landlord’s perspective, it wants to maintain the profitability of the center, retain flexibility to make efficient use of the center’s space, and preserve the ability renovate or expand the shopping center without being handcuffed by an obstinate tenant. A tenant, however, will almost always propose deleting this relocation provision from the lease. From the tenant’s perspective, as the saying goes, it is all about “Location, Location, Location!” Any other location would not be the space the tenant bargained for, particularly if the tenant loses a superior location with high visibility and high traffic. The tenant could also suffer a decrease in sales due to the loss of regular customers who cannot find its new location and incur additional costs in excess of the time and money already invested in the current location.

With higher vacancies at the center benefitting neither party in the long run, both parties may find it beneficial to reach some common ground with respect to a possible relocation, despite their differing positions on the lease relocation provision. While not exhaustive, and recognizing that the proposed language may depend upon the parties’ respective leverage or bargaining power, possible modifications to the relocation language might include:

• Restricting the landlord’s relocation right to specific occasions related to the addition, expansion, or reconfiguration of the shopping center or, additionally, only if such addition, expansion, or reconfiguration affects a certain amount of rentable square feet of the center (e.g., a relocation can only occur when landlord seeks to modify the shopping center in a manner that affects at least 50,000 rentable square feet of the center). Understandably, a tenant would not want a landlord to be able to move them solely because it has a tenant willing to pay more for their space. 
• Limiting the proposed relocation space to a certain area or zone or spaces mutually agreed to by both parties so that tenants could possibly ensure the similarity to its current space with respect to size, mall frontage and traffic. 
• Restricting the right of relocation to certain times of the year and having blackout periods for a tenant’s busiest time of the year. In fact, the landlord and tenant could agree that there will be no relocation in the first few years of the lease term. 
• Prohibiting the landlord from exercising its relocation right unless the tenant has a minimum number of years remaining on the lease.
• Requiring the relocation space to have a minimum amount of storefront. 
• Mandating that the landlord pay for additional costs, such as the relocation of the tenant’s merchandise or costs related to updating the tenant’s advertising (e.g., business cards, signage). 
• Providing the tenant greater veto power over a proposed relocation to spaces adjacent to unacceptable businesses (e.g., pet stores, nail salons, and game rooms). 
• Finally, providing either party the right to terminate the lease if they cannot mutually agree to the new relocation space.

So, while “Location, Location, Location!” may be a tenant’s battle cry upon seeing a relocation provision in its proposed lease, given the current state of big-box tenants, perhaps such proposed modifications will make the possibility of a “Relocation, Relocation, Relocation!” more palatable to the tenant.

In any case, landlords will have to think beyond merely relocating these current tenants. They will also have to decide what to do with these large empty spaces. Being able to relocate current tenants is only the tip of the iceberg. As discussed above, landlords could carve up the spaces and replace them with different uses including medical office, residential housing, or health/lifestyle/entertainment uses, such as gyms or movie theaters. But thinking outside the (big) box will also require landlords to take other considerations into account, including whether non-retail or multiple tenancies will succeed in replacing the center’s anchor tenant.

Expense is probably the biggest concern for the landlord. A face-lift for a retail center will be costly, and many landlords will not have the funds to make large, sweeping changes (like adding green space and a lake), and this would be on top of the costs landlords would incur to relocate current tenants. Additionally, many shopping centers are subject to reciprocal easement agreements, many of which are typically tied to the anchor tenant which recently vacated. These restrictions and/or documents will need to be unwound so that the centers can implement the proposed changes. Finally, the introduction of new uses to the center, such as housing, may require further zoning or variance modifications that must be approved by the municipality, which will only take more time and money.

With the increase in online shopping and the continued closure of traditional anchor or big-box tenants, landlords and owners of retail shopping centers must think outside the box to maintain a vibrant and profitable project. And given longer tenancy terms, the leases need to account for the possibility of these vacancies. To be sure, vacancies harm landlords, which suffer a loss in a significant rental income. But vacancies also hurt the tenants by decreasing foot traffic to the center. Landlords clearly want to easily replace these vacant spaces, but, in today’s climate, big-box tenants are not as easy to come by. Therefore, owners and landlords may propose re-positioning of these centers to include a variety of uses. This re-positioning, however, will require owners and landlords to consider a number of factors, including cost, restrictions, and the capability to make these changes, one of which will likely include the relocation of its current tenants. While unwinding any restrictions on the property and re-development of the site will present significant hurdles that landlords and owners must overcome, the ability to relocate current tenants could be one less obstacle if both landlord and tenant are able to find some common ground at the initial lease negotiations.