Include Eight Protections in Holdover Clause

If you haven’t negotiated a favorable holdover clause in your lease with a tenant, you may end up getting stuck with low rent and high costs if it won’t move out of the space when its lease term is over. That’s because to get rid of a tenant that doesn’t move out when its lease ends, you may have to start an expensive, time-consuming eviction proceeding. And the trouble doesn’t stop there: If you’ve already re-rented the space, the new tenant may sue you for damages because it can’t move in. On the other hand, if you haven’t yet re-rented the space, the presence of a holdover tenant could make prospective new tenants wary of getting involved.

You may think you’re protected from these problems if your lease has a holdover clause, giving you money damages if the tenant doesn’t move out. But many of the holdover clauses we’ve seen don’t offer owners the protection they need—and they may even give the holdover tenant an incentive to stay longer. Don’t get stuck with a troublesome holdover tenant. Instead, in your lease, plug the following common holdover loopholes that we’ve addressed in our Model Lease Clause: Avoid Disputes with Tough Holdover Clause Protections.

Loophole #1: Rent Doesn’t Increase Enough During Holdover Period

Most holdover clauses require the tenant to pay an increased base rent during any holdover period—usually one and one-half to three times the base rent that the tenant is paying at the end of the lease term. The purpose of increasing the base rent is to give the tenant an incentive to get out and to ensure that you won’t lose money during the holdover period. Unfortunately, this standard (and often unnegotiated) amount is often lower than it should be.

Tailor the amount of base rent the tenant must pay during the holdover period according to the type of tenant, the market conditions, the length of the lease, and the lease provisions. A higher base rent multiple—say four or five times the tenant’s base rent at the end of the lease—may be needed to adequately cover your costs and give the tenant an incentive to get out.

These factors may help you in determining holdover base rent:

Type of tenant. A tenant with deep pockets, such as a national retailer, can probably easily afford to pay two or three times the base rent. So if you’re dealing with a tenant with lots of resources, be sure that the holdover base rent is high enough to provide an incentive to leave—four or even five times the base rent. Doubling or tripling the base rent may be more than enough of an incentive for small tenants to move out when the lease ends.

Market conditions and length of lease. The length of the tenant’s lease is key when determining how high the holdover base rent should be. If the lease is for only three or five years, chances are the market rent won’t be drastically different at the time of the holdover, so you may want to double or triple the base rent unless other factors, such as the type of tenant, indicate the need for a higher holdover rent. But if the lease is for 10 years or more, you should set the holdover rent multiple even higher. There may be a substantial rise in rents by that time; the base rent when the lease ends may be very low compared to market conditions.

Lease provisions. Rent concessions or credits may affect the base rent at the end of the lease term, causing it to be artificially low. If so, be sure to set a higher holdover multiple to offset the low base rent. You’ll also probably need a higher multiple if a tenant pays percentage rent. The percentage rent tenant’s base rent is likely to be below the current market rate because you make up the difference with the percentage rent.

Loophole #2: Holdover Rent Increases Too Much

A tenant may be reluctant to sign a lease when confronted with a holdover base rent that’s five times its base rent—even though that amount may be reasonable overall. Try these compromises:

Tie holdover rent to market rent. When setting the holdover base rent, you’ll consider market conditions. But your estimates on whether or how much rents will rise over the length of the lease—especially a long one—may be off the mark. It’s fair to tie the holdover base rent to the market rent at the time of the holdover. You can do this by treating the market rent as a cap or treating it as a potential rent raiser.

To set the market rent multiple as a cap, set a high holdover base rent, but cap that amount based on a multiple of the market rate at the time of the holdover. So if the market rent didn’t increase as much as you thought, the tenant will pay less than the high holdover base rent amount.

You can also set the market rent multiple as a potential override. To do this, set the holdover base rent at an amount the tenant considers reasonable. But require the tenant to pay a higher amount if the multiple of market rent exceeds the holdover rent.

Make sure your holdover clause says that you alone determine the market rent. Don’t agree to call in an outside broker to settle a dispute about this. Remind the tenant that it will be in default during any holdover period and that you won’t waste time or money on assuring it that your reading of the current rental market is accurate. However, you can agree to “reasonably” determine the market rent.

Increase holdover rent over time. Offer to set the holdover base rent at a lower amount during the first month of the holdover and then increase it over time. But remember that it should be high enough even in the first month to motivate the tenant to leave. You can use this compromise as an alternative to, or in combination with, tying the rent to the market rate. If used in combination, then the holdover base rent would be the greater of, for example, two times the base rent or three times the market rent for the first month, three times the base rent or four times the market rent for the second month, and so on [Clause, par. b].

Loophole #3: Tenant Doesn’t Have to Pay Additional Rent, Percentage Rent

The holdover clause should clearly state that all percentage rent and all additional rent—such as operating and/or common area maintenance (CAM) charges, taxes, capital improvement costs—is still due and payable [Clause, par. c].

Loophole #4: Additional Rent, Percentage Rent Subject to Caps

The clause should also say that any caps or other limitations on additional or percentage rent don’t apply during the holdover period [Clause, par. c]. And lift any limitations on the portion of management fees or capital costs that can be included in determining a tenant’s pro rata share of the operating and/or CAM expenses.

Loophole #5: Renewal Options Remain in Effect

Often, a tenant with an option to renew or extend its lease thinks it doesn’t really have to surrender its space on the date the lease terminates—even if it hasn’t exercised its option properly or on time—as long as it intends to renew. But because the lease has expired, there’s no outside date by which a renewal must be signed. You could end up negotiating with a tenant for six months or even a year before reaching an agreement. Even worse, the tenant may eventually decide not to renew.

Your clause should say that renewal or extension options will be eliminated if there’s a holdover [Clause, par. d].

Loophole #6: Tenant Has Right to 30 Days’ Notice

When you have a holdover tenant, there’s a danger that a court will treat it as a month-to-month tenant having certain rights that you didn’t intend to give—such as a right to 30 days’ notice to terminate its holdover tenancy or a right to certain services.

To avoid this, you want the option of treating the tenant as a trespasser. To do this, the holdover clause should say that a tenant holding over shall be considered to have only a “tenancy-at-sufferance.” If a tenant argues that if it’s paying an increased base rent during the holdover period, as well as additional and percentage rent, it should be entitled to reasonable services and some type of notice to leave the premises, compromise by saying that if there’s a holdover, the tenant can stay on, subject to the terms of the lease, including the holdover provision, until—and only until—you notify it that you want it to leave. At that point, the tenant must immediately surrender the premises. There’s no required notice period, as with a month-to-month tenancy.

With this compromise, the tenant remains in the space and pays a high base rent until you really want the space back (that is, when you have another tenant) or until the tenant chooses to leave. This type of arrangement is called a “tenancy-at-will.”

You need protection, though, against a tenant that either doesn’t leave even after it gets a notice to vacate, or worse, gets a notice to vacate and defaults during the holdover period. At that point, you need the right to treat the tenant as a trespasser and to take the necessary legal action to remove it quickly—without further notice to vacate or opportunity to cure any default. To do this, have the holdover clause say that the tenant’s occupancy will immediately become a tenancy-at-sufferance if it defaults during the holdover period [Clause, par. a].

Loophole #7: Tenant Isn’t Liable for Your Damages

Unfortunately, some holdover clauses neglect to make the tenant liable for damages you might incur, such as being sued by a new tenant that can’t move in on time, or lost rent if because of the holdover you can’t find a new tenant.

Make sure the clause holds the tenant liable to you for all claims, losses, costs, and liabilities, including attorney’s fees, resulting from the tenant’s failure to move out at the end of the lease. Make it clear that this liability is additional to the tenant’s obligation to pay the increased base rent [Clause, par. e].

Loophole #8: Tenant Can Avoid Paying Legal Fees, Liquidated Damages

Have the holdover clause require the tenant to pay a minimum of $1,000 for your legal fees, as well as the costs and disbursements for each eviction proceeding, if you’re forced to pursue that. If your legal fees exceed $1,000, require the tenant to pay the higher amount [Clause, par. f].

Although most tenants will try to argue that actual legal fees should be less than $1,000 or that there should be some maximum amount set, stand firm. By the time you’re forced to start an eviction, you’ve given the holdover tenant considerable compromises, notices, and leeway.

The holdover clause should also say that the increased base rent together with any other money penalties set out in the lease won’t be considered “liquidated damages”—that is, a specific amount that one party to a contract agrees to pay to the other party if the contract is broken—for your losses. Otherwise, a court may limit the amount of damages you can collect to the increased base rent [Clause, par. g]. That’s because liquidated damages are an attempt to estimate damages in advance in situations where it would be difficult or impossible to calculate the actual damages the innocent party would suffer. And if a lease sets an amount that’s considered liquidated damages, then the owner can’t collect a higher amount—no matter what losses or costs it incurs.