Are you a Corporate Real Estate Tenant in a Lease Holdover Situation?

There are a few cases where the commercial real estate tenant may need additional time to vacate their premises beyond the end of the existing lease term:

■ They fully intended on moving but hadn’t located, or finalized an agreement for a new space (or their new space was not yet ready to occupy); or

■ They are winding up their business operations and (for whatever reason) needed more time to vacate; or

■ They were in the process of negotiating (or, in some cases, “re-negotiating”) a renewal of their existing landlord’s lease.

Most jurisdictions classify and define a holdover lease as follows:

■ Tenant At Sufferance. A CRE tenant is considered at sufferance when they continue to occupy the premises – – WITHOUT – – the landlord’s consent after the expiration of the original lease agreement.

■ Tenant At Will. A CRE tenant is consider at will when they continue to occupy the leased premises – – WITH – – the landlord’s consent after the expiration of the original lease agreement.

A well written commercial lease agreement should contain certain provisions relating to “holdover tenants”. For example: In the event that at the expiration of this Lease by lapse of time, Lessee shall – – with the written consent of Lessor – – hold over in possession of the Premises, such holding over shall be construed to be only a tenancy from month-to-month. Lessee shall pay a rental for the Premises of – – 125% – – 150% – – 200% — of the sum or sums as are provided to be paid during the term hereof. If Lessee holds over possession of the Premises – – without the written consent of the Lessor – – , the Lessee will pay rental in an amount equal to three (3) times the rental as provided herein to be paid during the term hereof.

While many landlords will attempt a 150% to 200% holdover provision, most landlords will agree to a 110 to 125%.  Some Landlords will agree to no increase in holdover rent for a few months before stepping up to the 125% range.

As a Tenant, you want to limit any liability that you would have in holdover.  Landlords in some cases can and will seek damages if you, as a holdover Tenant, get in the way of a new deal they negotiate.

There was a case in NYC where the judge placed fault on a holdover tenant who was still in the space after the Landlord gave notice to vacate. They could not get out, and ruined the deal for the Landlord with the new tenant trying to move into that space. The new tenant had no place to go (their former space had been leased). The tenant holding over was found to be at fault and was assessed penalties.

Under the Tenant At Sufferance status, the CRE tenant basically has two options.

■ First to be legally treated as a trespasser by the landlord, who in turn refuses and declines all attempted rental payments, while seeking timely eviction using the legal eviction process for the location of the property.

■ Second, the CRE tenant can request the landlord for a new lease term. Some jurisdictions prevent a landlord from holding a tenant to a full lease term of years, thus the lease term becomes a month-to-month tenancy.

Under the Tenant at Will status,

■ The CRE tenant can request the landlord to accept the tenant’s rent for a new lease term. Some jurisdictions prevent a landlord from holding a tenant to a full lease term of years, thus the lease term becomes a month-to-month tenancy.

■ The CRE tenant requests the landlord for a conditional month-to-month lease term, while negotiating with the landlord for a longer lease term.

Advance communications and good tenant / landlord relationships provides a favorable approach to securing advance renewals of leases and avoiding holdover conditions.

For additional information see Holdover Tenants Dealt a Legal Blow by Todd E. Soloway, Esq as published in NREI, 6 May 2006.

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