What happens at the end of a commercial lease when the tenant cannot move out in time? Clearly there are huge differences compared with a residential lease where the tenant can have very beneficial rights by statute. On the flip side, most commercial leases contain a provision entitled “Holding Over” to address a tenant overstaying its lease term. The provision can be highly negotiable in certain instances. However, it is important for the landlord to have the ability to move a tenant out of its building in a timely manner. The main reason for this is that a new lease with a replacement tenant may be signed well ahead of a space being vacated by the previous tenant. If the landlord can’t get access to the space in question for the new tenant, it can be costly for all the parties involved. My friend Gregg Pasternack addresses the details of the Holding Over provision below:
Office leases normally contain a provision that imposes penalties on tenants that overstay their welcome and remain in their premises beyond their expiration date. Typically, Base Rent is increased significantly, and Tenant indemnifies Landlord for any damages incurred as a result of Tenant’s holdover. These concepts generally cannot be negotiated away completely, but there are, of course, certain key issues to be aware of when addressing this provision.
The Holdover Rate:
As with many issues, negotiation of the holdover rate varies by leverage, and by market. If you’re a 50,000 RSF user, your arguments are, of course, going to sound more persuasive than the same argument advanced by a tenant leasing 5,000 RSF. Further, some markets tend to punish holdover tenants more than others. However, as a general rule, you want to obtain at least 2 months of holdover paying Base Rent at 125%-150% of the immediately preceding rental rate (with Tenant paying 100% of the Operating Expenses component), with the rate increasing to 150%-200% thereafter. Try to avoid language that makes the rental rate “the greater of 150% or the fair market value of the Premises at the time of holdover,” since fair market value in terms of holdover will turn into whatever Landlord says it is. Clearly, this can expand your client’s liability. But perhaps more importantly, it can also make it more difficult to obtain protection from a future landlord, in the event such landlord cannot deliver your client’s new space on time. If the new landlord is delayed in delivering the new space, your client will want to be reimbursed for any holdover damages incurred at their current space. The new landlord will be far more willing to provide the requested reimbursement if there is cost certainty.
With or Without Consent:
Some leases draw a distinction between holding over with, or without, Landlord’s consent. Customarily, the holdover penalty is more severe in the case of a holdover without Landlord’s consent. On the surface, this appears to make sense, since a holdover without Landlord’s consent seems far more contemptible and accordingly, more worthy of punishment. However, this structure is really just a misdirection by Landlord, aimed at securing a higher holdover rate. Essentially, ALL hold-overs are without Landlord’s consent. If Landlord consents to Tenant remaining in the Premises, Tenant is not really holding over. Rather, the lease term is merely extended. The rate for such an agreed-upon period of time should be, naturally, whatever the parties agree to. Depending on the situation, Tenant may be able to keep their existing rental rate, or perhaps it increases. However, we don’t need to negotiate that eventuality years in advance. What needs to be provided is what the penalty will be if Tenant holds over without Landlord’s consent, and that is what should be dealt with in this provision. The “market” holdover penalty (discussed above) should apply to THAT scenario, and not to a “with consent” holdover, which then allows Landlord to slip in an even more punitive penalty for the “without consent” scenario.
Virtually every provision will contain language which provides that Tenant will be responsible for ALL costs incurred by Landlord to the extent caused by Tenant’s holdover, and this includes any liability resulting from Tenant’s failure to surrender the Premises on time, including any claims made by any succeeding tenant founded upon such failure to surrender, and any lost profits to Landlord resulting therefrom. The key element here is lost profits – if your client holds over and Landlord’s next tenant is able to terminate the Lease as a result of Landlord’s failure to timely deliver the space, Landlord may lose thousands or even millions of dollars, and your client could be on the hook for that. The good news is that Landlords almost invariably protect themselves against potentially devastating termination rights, so it’s unlikely this liability will arise absent a very long holdover (3-6 months at least). Nevertheless, it’s wise to try to negotiate at least some grace period following the expiration date (usually 30-60 days), during which no liability for consequential damages applies.
If you are a big tenant, don’t be afraid to ask for major concessions here. It’s not unusual for large tenants to get the right to several months of holdover without ANY penalty, with increases as little 10% thereafter. And though it’s unlikely you’ll get Landlord to waive its right to recover consequential damages at some point, a grace period of 3-6 months before such liability kicks in is often obtainable.