Get 7 Protections to Avoid Getting Burned on Tenant Holdovers
Holdovers can be a nightmare for landlords. When tenants don’t clear out after their lease expires, you may have to go to court to evict them. Meanwhile, the replacement tenant can’t move into the space and could end up suing you. Or, if you haven’t yet re-rented the space, the presence of the holdover tenant may hinder your efforts to find a new tenant. Adding insult to injury, if the rental market is hot, the holdover tenant may end up paying you much less rent than the space would otherwise command.
We got this one covered, you may be thinking. After all, our standard lease includes a strong holdover clause. But does it? Boilerplate holdover clauses may not give you all the protection you need; and if the holdover terms aren’t punitive enough, the clause might even incentivize the tenant to continue holding over for as long as possible. Bottom Line on Top: What you need from your holdover clause is assurance that:
- The holdover rent is well above the market rent at the time of holdover;
- There are no caps or limits on additional and percentage rent;
- The tenant can’t renew or amend the lease while it holds over;
- The tenant is obligated to meet all terms of the lease without accruing the right to remain in the space;
- The tenant is liable for all the damages and costs you incur as a result of its failure to move out; and
- The tenant must pay the legal fees you wrack up in bringing an eviction lawsuit.
Here’s how to draft a holdover clause that incorporates all of these protections, along with a Model Lease Clause: Add Teeth to Your Holdover Clause, that you can adapt for your own situation.
1. Ensure Ample Holdover Base Rent
While your lease may require tenants to pay higher base rent during a holdover, the rate you agreed to when negotiating the lease may ultimately turn out to be too low to really sting the tenant and cover your losses.
Plan A: Establish high holdover rate multiplier. Rather than agreeing to a set amount in advance, establish a formula for calculating holdover base rent using a high multiple—as high as four or five times the base rent at the end of the lease. In establishing a fair multiple, account for the following factors:
Type of tenant: First, consider who the tenant is and what it can reasonably afford. Thus, a national retail store or large corporate tenant may be able to afford to pay holdover rent at a multiple of four or even five times above normal base rent, whereas a multiple of double or triple base rate may be more than enough for a mom-and-pop operation.
Length of lease term: Holdover rent must be significantly above the current market rate to motivate a holdover tenant to vacate and to cover your opportunity costs. The longer the tenant has been in the space, the greater the likely disparity will be between the rent at the end of the term and the market rate for the space. Thus, if the lease has run for only two or three years, there probably won’t be much difference between the actual and market rent, in which case a multiple of two or three should be adequate. However, a lease that has lasted for 10 years or more may require a much higher multiple.
Rent discounts and credits: Take into account any rent concessions, credits, or other benefits that you granted the tenant that may artificially deflate the base rate amount. To be made whole, you may need a higher multiple to offset the artificially reduced base rent. A higher multiple may also be necessary with percentage rent tenants to the extent their base rate is likely to be well below market.
Plan B: Compromise on holdover base rent. While tenants are generally willing to pay more rent for holding over, high base rate multiples may scare them away. So, depending on the tenant and its bargaining leverage, you may have to compromise.
The first possibility: Rather than setting a high multiple to ensure that tenants who hold over in the future pay base rent above market rates, tie holdover rent to market rates in place if and when a holdover actually does occur. There are two basic approaches:
Set market rate multiple as 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. This way, if market rent increases by less than you anticipate, the tenant won’t have to pay the full increase provided for by the multiple.
Example: You agree to a multiple of five times the actual base rent at the end of the lease, while capping the holdover base rent at three times market rent at that time. The tenant’s base rent at the end of the lease is $10,000. At five times base rent, tenant would owe $50,000 in base rent during the holdover. But under the compromise, if the market rate at the end of the lease is $10,400, the tenant need only pay $31,200 (3 x $10,400) in holdover base rent.
Set market rent multiple as potential override: If you’re expecting a dramatic increase in market rent, you may be better served by setting holdover base rent at an amount the tenant considers reasonable but requiring the tenant to pay a higher amount if the multiple of market rent exceeds the holdover rent.
Example: You set the holdover base rent as the greater of: (1) two times the base rent payable by the tenant at the end of the lease; and (2) three times the market rent. Using the same $10,000 base rate but assuming a market rate of $15,000, the tenant would normally owe $20,000 in holdover base rent (2 x $10,000). But thanks to the override, the tenant would be on the hook for $45,000 per month (3 x $15,000).
Strategic Pointer: Regardless of which method you use, be sure to specify that you get to determine the market rent. If the tenant insists, require that your determination of market rent be “reasonable.”
The second possibility for compromising on holdover base rent is to increase it over time so that the longer the tenant holds over, the higher the base rent becomes. This may be a fair approach when costs won’t be high when the holdover first occurs but will significantly increase the longer it continues. Our Model Lease Clause actually uses this compromise in combination with a formula tying holdover base rent to market rates. Thus, the tenant pays a multiplier of three in the first month, four in the second month, and five in the third and subsequent months of the holdover [Clause, par. b].
2. Keep Tenant on Hook for Additional and Percentage Rent
Clearly state that paying the holdover base rent doesn’t relieve the tenant of its obligation to continue paying all other forms of additional rent that the lease requires, such as percentage rent, CAM costs, taxes, capital improvement costs, etc. For extra oomph, specify that any caps or limits on those additional rents don’t apply if a holdover occurs [Clause, par. c]. The clause should also eliminate any limits to the portion of management fees or capital costs that can be included in determining the tenant’s pro rata share of the operating and/or CAM expenses under the lease.
3. Bar Holdover Tenant from Exercising Renewal Option
Tenants holding an option to renew or extend the lease may get the impression that they’re allowed to holdover after the lease ends even if they haven’t actually exercised their option by then. They might even deliberately exercise the option after the holdover starts as a bargaining tactic hoping that you won’t charge them holdover rent as long as you’re negotiating the terms of the renewal or extension. Of course, those negotiations may drag on for months, especially if the tenant knows it can stay in the space and keep paying rent at the lease rather than holdover rate. And if the deal falls through and the tenant walks away, your gamble on not charging the tenant holdover rent during negotiations may come up snake eyes.
To avoid getting caught in this situation, make sure the lease bars the tenant from exercising any renewal or extension options once the holdover begins. This will incentivize the tenant to exercise the option well before the lease ends while there’s still time for negotiating the renewal or extension terms without having to cough up holdover rent [Clause, par. d].
Negotiating Tip: Tenants may try to keep their option intact in case negotiations that begin during the lease term drag on into the holdover period, provided that they’re “diligently” or “reasonably” negotiating the terms of the renewal or extension at that time. They might even take things a step farther and ask you to waive the entire holdover clause in such a situation.
Don’t take the bait, attorneys caution. In addition to inviting disputes over what “diligent” and “reasonable” negotiations means, agreeing to such a provision may damage your bargaining position since once the holdover begins, the clock will be working in the tenant’s and not your favor. Also remember that you can always waive the terms of the holdover clause when the time comes if you believe it’s in your interest. Agreeing to a waiver in advance will just tie your hands and reduce your options and leverage.
4. Eliminate Holdover Tenant’s Month-to-Month Tenancy Rights
Tenants that stay in the space after their lease ends may argue, and a court may agree, that the occupancy constitutes a month-to-month tenancy. That’s a bad outcome because month-to-month tenants have certain rights, including the right to 30 days’ termination notice, that landlords don’t normally want holdovers to have. Legally, what you want is to be able to treat the tenant as a trespasser.
The good news is that there’s technical lease language you can use to accomplish this objective. Specifically, the lease should state that if it holds over, the tenant will have only what’s called a “tenancy-at-sufferance.” Of course, tenants have lawyers, too. If you expect me to pay high holdover rents, you should at least give me termination notice and the other rights of a month-to-month tenant, those tenant lawyers may counter.
Potential compromise: Say that if a holdover occurs, the tenant may stay in the premises “subject to” all lease terms, including the holdover clause until—and only until—you notify the tenant that you want it to leave, in which case the tenant must surrender the premises immediately. Such a situation in which a tenant remains in the space and pays a premium rate until the landlord demands surrender of the space (or the tenant leaves early of its own accord) is called a “tenancy-at-will.”
One final loose end to tie up: Get protection in case the tenant doesn’t leave even after getting notice to vacate or worse, defaults after receiving the notice. At that point, you need to be able to treat the tenant as a trespasser and take all necessary legal action to get it out of the space without having to provide further notice to vacate or opportunity to cure any lease defaults. So, the holdover clause should say that the tenant’s occupancy will immediately become a tenancy-at-sufferance if it defaults during the holdover period [Clause, par. a].
5. Make Holdover Tenant Liable for Your Consequential Damages
While standard holdover lease clauses typically provide for higher rents, they may overlook the costs landlords incur as a result of a holdover. As we noted at the start of this analysis, those consequential costs can be huge. In addition to liability for failing to deliver the premises, the new tenant may sue you for the costs it incurs in storing its inventory, cancelling its move, and postponing its business opening. Maybe the new tenant will be forced to hold over and pay its own landlord premium rents. Or maybe it will have to pay a broker to find it a new space. You may also miss out on a lot of money even if you haven’t re-rented the space.
To guard against these losses, ensure that the lease holds the tenant liable to you for all claims, losses, costs, and liabilities you suffer as a result of its failure to vacate at the end of the lease. Specify that this liability is in addition to the tenant’s obligation to pay increased base and additional rent for holding over [Clause, par. e].
6. Make Holdover Tenant Liable for Attorney’s Fees
If all else fails, you may have to go to court to evict a holdover tenant. Since attorneys don’t usually work for free, that can cost you a lot of money. So, make the tenant liable for attorney’s fees. Our Model Lease Clause requires the tenant to pay a minimum of $2,500 per proceeding, as well as any disbursements above that amount [Clause, par. f].
7. Clarification that Holdover Liabilities Aren’t Liquidated Damages
The holdover clause should clarify that the additional base rent and other amounts that the tenant must pay for holding over don’t constitute “liquidated damages” covering your losses. Absent such language, a court may limit the amount of damages you can collect to the increased base rent [Clause, par. g].
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