In the Spotlight: Holdover Tenancies

Whether blinded by the glow of new business or fatigued by a lengthy and intense negotiation of terms, landlords entering into commercial leases are not often keen to focus on events that may occur at the end of the term. Pen in hand, landlords are usually anxious to settle in to what promises to be a long-term, mutually beneficial association. However, tenants that fail to vacate their premises at the expiration of the term can cause significant damage to the economic health of a commercial property, and landlords should take measures to protect themselves against such damage and ensure a seamless transition from one tenant to the next.

Why Hold Over?

Virtually every lease contains an obligation of the tenant ' express or implied ' to surrender the leased premises to the landlord upon the expiration or sooner termination of the term. A tenant that fails to do so is referred to as a “holdover tenant.” There are a variety of reasons why a tenant may retain possession following the expiration of the term. The tenant may not have concluded winding down its business, or may simply be abandoning its business in the space. The tenant may have failed to cause a subtenant to vacate the premises, or may have failed to remove certain improvements or trade fixtures. A holdover may even be deemed to occur when the tenant has caused the premises to be contaminated with hazardous substances.

Most commonly however, a tenant will hold over because it has either failed to identify replacement space, or failed to conclude negotiations for renewal of the existing lease or the lease of new space following the end of its term. No matter the underlying reason, a tenant has held over the moment it prevents the landlord from repossessing the space in the condition required under the lease.

The Tenant's Holdover Status

From and after the tenant's failure to yield possession of the premises following the term of its lease, the issue arises as to the length of the term created by the tenant's holdover. Depending on the language of the lease, the tenancy may be considered a tenancy for years, a tenancy at will or a tenancy at sufferance. A tenancy for years is a tenancy for a fixed amount of time, be it year-to-year, month-to-month or otherwise. A tenancy at will is a tenancy that arose out of an agreement with the landlord and extends with the landlord's consent for an indefinite period. A tenancy at sufferance is a tenancy that continues without the landlord's consent until the landlord delivers to the tenant a notice to vacate the premises. While a tenancy at sufferance does not arise from the terms of an agreement between the parties, the landlord may nevertheless continue to enforce the provisions of the lease.

Protecting the Landlord's Rights

With these terms as a backdrop, the landlord should ensure that certain protective provisions are included in the lease. For instance, the landlord should be afforded the right upon any holdover to elect, with notice to the tenant, to declare the length and conditions of the holdover term. While it may seem that a longer tenancy would be preferred by the landlord, in fact the tenancy at sufferance is often most favorable for the landlord, as it minimizes the tenant's rights and affords the landlord the strongest position when pursuing an eviction, while still maintaining the landlord's right to enforce the terms of the lease. Hence, the holdover provision should provide for an automatic election of a tenancy at sufferance if the landlord fails to make an affirmative election.

A tenant may allege that the landlord consented to the tenant's holdover by failing to enforce legal remedies against the tenant, or by accepting rent following the expiration of the term. The tenant may argue that by accepting an installment of rent, the landlord has assented to a new term and impliedly created an extended right of possession in favor of the tenant. The provisions of the lease are especially critical in this area, as the landlord's affirmative election should be the sole determinant of the terms and conditions of any subsequent lease term. The lease should clearly state that no tenant holdover, and no implied act or acquiescence by the landlord, shall be construed as an extension of the term or deemed to be a waiver by the landlord of any right of re entry or right to immediate possession.

Perhaps the most commonly negotiated term in a holdover provision is that of the base rent payable by the tenant during the holdover period. Customarily, the parties will negotiate that during any holdover period the tenant will be liable for base rent at a rate equal to some factor ' most commonly, 150% or 200% ' of the base rent, payable immediately prior to the holdover as liquidated compensatory damages to the landlord. A tenant may argue for leniency if it holds over for only a short period due to unforeseen events like last-minute construction or possession delays at its new space. If the landlord concedes, the parties may agree to a modest rent increase for the first 30 or 60 days of the holdover and a more punitive escalation thereafter.

If the landlord elects a tenancy at sufferance, then the lease should provide for a daily base rent factor. In addition, landlords should be cognizant of the interaction of state law in this area, as several states have enacted statutory penalties for “willful” holdover, which may result in rental rates as much as 200% of the fair market rent for the premises.

A landlord's greatest fear may be realized when a holdover tenancy contributes to the demise of a lucrative sale of the building or a long-term lease agreement with a prospective tenant. In this circumstance, even increased base rental may not compensate the landlord for the damages it has suffered as a result of the delinquent tenant. Therefore, the lease should provide that in addition to the liquidated compensatory damages represented by increased rent, the tenant may be liable for consequential damages resulting from its holding over.

Alternatively, a stronger credit tenant might negotiate an intermediate position, whereby the tenant is not liable for consequential damages, but may be liable for direct damages, including, for instance, the cost of additional rental abatement granted to a prospective tenant who has signed a lease with the landlord.

The following is an example of a landlord-friendly holdover provision:

If Tenant retains possession of the Premises or any part thereof after the expiration or sooner termination of the term of this Lease, then Landlord may at its option within thirty (30) days after such expiration or termination deliver written notice to Tenant that such holding over constitutes either: (a) an extension of the term of this Lease for one year, and from year-to-year thereafter, with base rent payable in an amount equal to two hundred percent (200%) of the monthly base rent payable immediately prior to such expiration or termination, or (b) a month-to- month tenancy, upon all of the terms and conditions of this Lease except with base rent payable in an amount equal to two hundred percent (200%) the monthly base rent payable immediately prior to such expiration or termination, or (c) a tenancy at sufferance, with base rent payable in an amount equal to ____________________ Dollars ($______) per day while Tenant remains in possession of the Premises or any part thereof. If no such written notice is delivered by Landlord, then a tenancy at sufferance with base rent payable as stated in subsection (c) above shall be deemed to have been created. Tenant acknowledges and stipulates, with the intent to be estopped from asserting otherwise, that the holdover rent specified in this Section constitutes a fair and reasonable determination of uncertain compensatory damages attributable to Tenant's withholding of possession of the Premises from Landlord after the expiration or sooner termination of this Lease, and shall be enforceable whether or not such withholding is determined to be in bad faith, willful or otherwise. As such, the holdover rental specified in this Section shall be deemed to be in the nature of and shall constitute liquidated compensatory damages and not a penalty. Tenant shall also pay to Landlord, in addition to the stipulated liquidated compensatory damages specified above, all consequential damages actually sustained by Landlord as a proximate result of Tenant's retention of possession, which consequential damages may include, without limitation, liability incurred or damages sustained by Landlord by reason of Landlord's inability to timely deliver absolute possession of the Leased Premises to a subsequent Tenant or a bona fide purchaser of the Premises. The provisions of this Section shall survive the expiration or sooner termination of this Lease and shall not constitute a waiver by Landlord of any right of re entry as set forth in this Lease. Receipt by Landlord of any rent or any other act in apparent affirmance of tenancy shall not operate as a waiver of Landlord's right to terminate this Lease for Tenant's breach of any of the covenants contained in this Lease, nor a waiver of any other right of Landlord arising under this Lease or at law or in equity.

Conclusion

While the mere prospect of a holdover terrifies most commercial landlords, a thorough and well-drafted lease provision will provide comfort to the landlord, motivate the tenant by eliminating its options for legal resistance, and leave the landlord in the strongest position possible when seeking to enforce its remedies.

David P. Resnick is a member of this newsletter's Board of Editors. He is a Partner at Robbins Salomon and Patt, Ltd. in Chicago, concentrating his practice in commercial real estate development leasing and finance. He can be reached at [email protected].

Whether blinded by the glow of new business or fatigued by a lengthy and intense negotiation of terms, landlords entering into commercial leases are not often keen to focus on events that may occur at the end of the term. Pen in hand, landlords are usually anxious to settle in to what promises to be a long-term, mutually beneficial association. However, tenants that fail to vacate their premises at the expiration of the term can cause significant damage to the economic health of a commercial property, and landlords should take measures to protect themselves against such damage and ensure a seamless transition from one tenant to the next.

Why Hold Over?

Virtually every lease contains an obligation of the tenant ' express or implied ' to surrender the leased premises to the landlord upon the expiration or sooner termination of the term. A tenant that fails to do so is referred to as a “holdover tenant.” There are a variety of reasons why a tenant may retain possession following the expiration of the term. The tenant may not have concluded winding down its business, or may simply be abandoning its business in the space. The tenant may have failed to cause a subtenant to vacate the premises, or may have failed to remove certain improvements or trade fixtures. A holdover may even be deemed to occur when the tenant has caused the premises to be contaminated with hazardous substances.

Most commonly however, a tenant will hold over because it has either failed to identify replacement space, or failed to conclude negotiations for renewal of the existing lease or the lease of new space following the end of its term. No matter the underlying reason, a tenant has held over the moment it prevents the landlord from repossessing the space in the condition required under the lease.

The Tenant's Holdover Status

From and after the tenant's failure to yield possession of the premises following the term of its lease, the issue arises as to the length of the term created by the tenant's holdover. Depending on the language of the lease, the tenancy may be considered a tenancy for years, a tenancy at will or a tenancy at sufferance. A tenancy for years is a tenancy for a fixed amount of time, be it year-to-year, month-to-month or otherwise. A tenancy at will is a tenancy that arose out of an agreement with the landlord and extends with the landlord's consent for an indefinite period. A tenancy at sufferance is a tenancy that continues without the landlord's consent until the landlord delivers to the tenant a notice to vacate the premises. While a tenancy at sufferance does not arise from the terms of an agreement between the parties, the landlord may nevertheless continue to enforce the provisions of the lease.

Protecting the Landlord's Rights

With these terms as a backdrop, the landlord should ensure that certain protective provisions are included in the lease. For instance, the landlord should be afforded the right upon any holdover to elect, with notice to the tenant, to declare the length and conditions of the holdover term. While it may seem that a longer tenancy would be preferred by the landlord, in fact the tenancy at sufferance is often most favorable for the landlord, as it minimizes the tenant's rights and affords the landlord the strongest position when pursuing an eviction, while still maintaining the landlord's right to enforce the terms of the lease. Hence, the holdover provision should provide for an automatic election of a tenancy at sufferance if the landlord fails to make an affirmative election.

A tenant may allege that the landlord consented to the tenant's holdover by failing to enforce legal remedies against the tenant, or by accepting rent following the expiration of the term. The tenant may argue that by accepting an installment of rent, the landlord has assented to a new term and impliedly created an extended right of possession in favor of the tenant. The provisions of the lease are especially critical in this area, as the landlord's affirmative election should be the sole determinant of the terms and conditions of any subsequent lease term. The lease should clearly state that no tenant holdover, and no implied act or acquiescence by the landlord, shall be construed as an extension of the term or deemed to be a waiver by the landlord of any right of re entry or right to immediate possession.

Perhaps the most commonly negotiated term in a holdover provision is that of the base rent payable by the tenant during the holdover period. Customarily, the parties will negotiate that during any holdover period the tenant will be liable for base rent at a rate equal to some factor ' most commonly, 150% or 200% ' of the base rent, payable immediately prior to the holdover as liquidated compensatory damages to the landlord. A tenant may argue for leniency if it holds over for only a short period due to unforeseen events like last-minute construction or possession delays at its new space. If the landlord concedes, the parties may agree to a modest rent increase for the first 30 or 60 days of the holdover and a more punitive escalation thereafter.

If the landlord elects a tenancy at sufferance, then the lease should provide for a daily base rent factor. In addition, landlords should be cognizant of the interaction of state law in this area, as several states have enacted statutory penalties for “willful” holdover, which may result in rental rates as much as 200% of the fair market rent for the premises.

A landlord's greatest fear may be realized when a holdover tenancy contributes to the demise of a lucrative sale of the building or a long-term lease agreement with a prospective tenant. In this circumstance, even increased base rental may not compensate the landlord for the damages it has suffered as a result of the delinquent tenant. Therefore, the lease should provide that in addition to the liquidated compensatory damages represented by increased rent, the tenant may be liable for consequential damages resulting from its holding over.

Alternatively, a stronger credit tenant might negotiate an intermediate position, whereby the tenant is not liable for consequential damages, but may be liable for direct damages, including, for instance, the cost of additional rental abatement granted to a prospective tenant who has signed a lease with the landlord.

The following is an example of a landlord-friendly holdover provision:

If Tenant retains possession of the Premises or any part thereof after the expiration or sooner termination of the term of this Lease, then Landlord may at its option within thirty (30) days after such expiration or termination deliver written notice to Tenant that such holding over constitutes either: (a) an extension of the term of this Lease for one year, and from year-to-year thereafter, with base rent payable in an amount equal to two hundred percent (200%) of the monthly base rent payable immediately prior to such expiration or termination, or (b) a month-to- month tenancy, upon all of the terms and conditions of this Lease except with base rent payable in an amount equal to two hundred percent (200%) the monthly base rent payable immediately prior to such expiration or termination, or (c) a tenancy at sufferance, with base rent payable in an amount equal to ____________________ Dollars ($______) per day while Tenant remains in possession of the Premises or any part thereof. If no such written notice is delivered by Landlord, then a tenancy at sufferance with base rent payable as stated in subsection (c) above shall be deemed to have been created. Tenant acknowledges and stipulates, with the intent to be estopped from asserting otherwise, that the holdover rent specified in this Section constitutes a fair and reasonable determination of uncertain compensatory damages attributable to Tenant's withholding of possession of the Premises from Landlord after the expiration or sooner termination of this Lease, and shall be enforceable whether or not such withholding is determined to be in bad faith, willful or otherwise. As such, the holdover rental specified in this Section shall be deemed to be in the nature of and shall constitute liquidated compensatory damages and not a penalty. Tenant shall also pay to Landlord, in addition to the stipulated liquidated compensatory damages specified above, all consequential damages actually sustained by Landlord as a proximate result of Tenant's retention of possession, which consequential damages may include, without limitation, liability incurred or damages sustained by Landlord by reason of Landlord's inability to timely deliver absolute possession of the Leased Premises to a subsequent Tenant or a bona fide purchaser of the Premises. The provisions of this Section shall survive the expiration or sooner termination of this Lease and shall not constitute a waiver by Landlord of any right of re entry as set forth in this Lease. Receipt by Landlord of any rent or any other act in apparent affirmance of tenancy shall not operate as a waiver of Landlord's right to terminate this Lease for Tenant's breach of any of the covenants contained in this Lease, nor a waiver of any other right of Landlord arising under this Lease or at law or in equity.

Conclusion

While the mere prospect of a holdover terrifies most commercial landlords, a thorough and well-drafted lease provision will provide comfort to the landlord, motivate the tenant by eliminating its options for legal resistance, and leave the landlord in the strongest position possible when seeking to enforce its remedies.

David P. Resnick is a member of this newsletter's Board of Editors. He is a Partner at Robbins Salomon and Patt, Ltd. in Chicago, concentrating his practice in commercial real estate development leasing and finance. He can be reached at [email protected].