By: Gerald H. Morganstern, Partner, Goetz Fitzpatrick LLP
Holdovers are not a frequent problem, yet landlords keep making holdover provisions more onerous and lengthy when drafting new leases. Typically landlords look for two or three times the current rent, payable for each month in which the tenant holds over, plus damages, including claims by a new tenant that cannot get into the space. I like to end up with a fairer provision, so that holdover is for use and occupancy at 125 percent of current rent for the first 30 days, 150 percent for the next 30 days and 200 percent thereafter. Current rent may mean fixed monthly rent or may include escalations in the multiple. Use and occupancy would be clarified to mean the tenant only pays for the days of the month it holds over and not the entire month. Indirect or consequential damages, usually claims by the new tenant, would only be allowed if the tenant holds over more than 30 (or 60) days, or, if the tenant can negotiate it, (b) landlord has notified the tenant that it has signed a new lease with a third party.
To avoid a holdover a tenant should begin thinking about its space about 15 months before its lease is set to expire, or at least three months before it has to exercise a renewal option.
Today, the choice is not just exercise the option or move. Many tenants are negotiating lease extensions on terms that differ from the option provisions. If negotiations are still underway when the time to exercise the option is about to expire, the parties will usually agree to a standstill agreement, thus delaying the exercise date. It’s highly recommended that during this period, a tenant engage a broker to advise on market conditions and rents, and to negotiate any extension with a landlord.
A cautionary note: A holdover can occur at the expiration or other termination of the lease. The lease will probably provide for termination in the event of a major casualty, condemnation or material default by the tenant. These events will not give a tenant much lead time to surrender and move. A good lease will cover these possibilities.
Finally, it should be clear what constitutes a holdover. At lease end, a tenant is generally required to remove its personal property and may also be required by the lease to remove fixtures and other alterations—especially if they are custom or unusual alterations. A typical lease states that 30 days before lease end the landlord will advise what has to be removed. Moreover, the language must make clear that when approving an alteration the landlord will state in writing whether the alteration must be removed before the lease expires. In each event, the tenant is usually required to repair damage from such removals. If there is a failure to repair, the landlord usually has the right to do the necessary work and hold the tenant liable for its costs and damages. If the premises are not vacant, the landlord could claim that the tenant is still in possession, even if keys were delivered to the landlord. The landlord may also claim that by failing to remove specialty alterations the tenant has not surrendered the premises, therefore constituting a holdover. Avoiding the harsh holdover penalties that could be asserted by a landlord is best solved by clear lease language and compliance with those terms.