Limit Holdover Rent Cuts to Short Holdovers

Getting tenants to leave their space when the lease ends can be a difficult and costly proposition. For one thing, you may have to initiate an eviction suit to get the tenant out. And if you’ve already re-rented the space, holdovers expose you to the risk of being sued by the new tenant for failing to deliver the space on time. All of this makes the holdover rent rate a crucial issue in typical lease negotiations. If a tenant is in a strong bargaining position, you may have to give in on rates. But here’s a strategy for compromising on rates without sacrificing financial protections against holdovers that last an extended period.

What’s at Stake

Landlords seek meaningful disincentives to prevent tenants from holding over. By contrast, tenants want flexibility to remain in the space temporarily at a reasonable rate if they can’t vacate on time, for example, because their new space isn’t yet ready or the moving company goes on strike. Typical dynamic: The landlord proposes a 200 percent premium holdover rent in the lease first draft. The tenant counters with a much lower rate, like 125 percent. The horse trading ensues, and the sides end up meeting somewhere in the middle.

How to Structure Compromise

But there should be more to the compromise than simply the holdover rate, cautions a veteran New York City leasing attorney. The landlord should also ensure that the rate compromise is memorialized in an agreement that includes certain built-in safety nets and guardrails to protect its interests. To achieve this objective, the attorney recommends adding the following lease language (based on a scenario where the landlord has agreed to discount its standard 200 percent holdover rate to 150 percent):

Model Lease Language

Holdover Rent. If any holdover period exceeds thirty (30) days, then the aforementioned one hundred fifty percent (150%) rate shall be deemed automatically increased to two hundred percent (200%), and shall apply to the full duration of the entire holdover period beginning with the very first (1st) day on which the holdover originally commenced immediately following the expiration or earlier termination of the Lease.

This provision grants the tenant a measure of short-term relief while ensuring that the concessionary 150 percent rate (and holdover itself) doesn’t last forever. If the holdover period becomes prolonged, the 200 percent holdover rate springs back to life. Moreover, the 200 percent rate gets grandfathered so that it applies not just to the extended period (30 days in our example) but also retroactively to the very first day of the holdover period. In effect, it unwinds the 150 percent discounted rate for the first 30 days and replaces it with the 200 percent rate, as if the discount had never been granted at all.

Bottom Line

The compromise is fair to both sides. It gives tenants limited flexibility to hold over for a pre-determined—and short—grace period, as well as a powerful financial incentive to end the holdover before that initial grace period expires. “Based on the experience of my own clients, this arrangement is a win-win solution to the holdover problem,” the New York City attorney attests.