Buck Trend of Onerous Holdover Provisions
The point of agreeing on a lease term—which specifies the dates on which the tenant may move in and by which the tenant must move out of the space—is to provide both sides with advanced notice so they can make decisions that can have serious financial consequences. When the lease term is nearing its end, the tenant can work ahead of time to find space elsewhere that suits its needs at a base rent it can afford; the owner can line up replacement tenants and prepare the space ahead of time with things like tenant improvements for a new office tenant or retail business. But what happens when a tenant doesn’t move out of its space on time? It becomes a holdover tenant and can be very problematic. (For example, a holdover tenant could prevent a lucrative new tenant from accessing the premises to prepare for its occupancy.)
It’s hard to blame commercial property owners for taking every precaution they can to protect themselves against damage from holdover tenants that refuse to vacate after their leases have expired. Owners discourage such behavior by including holdover provisions in their leases that penalize tenants for failing to move out according to their lease terms. While strict holdover clauses are understandable, your number-one concern should be protecting your own interests. How can you do this? Modify typical owner holdover provisions so they are in your favor.
One important modification you should push for is to lower holdover rent. Tenants in a strong bargaining position are often successful in insisting that holdover rent be no more than what they were paying before the holdover period began. Others may be able to convince an owner that they should pay no more than the current fair market rental rate. Typically, parties with relatively equal bargaining strength agree that holdover rent should be between 125 percent to 150 percent of the rent payable for the last month of the lease term. Weaker tenants, however, may be forced into agreeing to rates as high as 300 percent.
If you cannot negotiate for a lower holdover rent, suggest having the holdover payment percentage increase in stages, after certain time intervals have passed—for example, every two months.
Another way to slant things in your favor is to refuse personal liability. Unless a tenant is desperate to rent a particular space, it will usually refuse to sign a lease that would make its principals liable for damages. Most owners will agree to this, although they may be reluctant to do so if a tenant is a poor credit risk. If a principal is guarantying a tenant’s obligations under a lease anyway, a well-written guaranty will probably provide that the guarantor is responsible for holdover damages in any event.
For three more ways to revise an overly restrictive holdover clause, see “Negotiate Tenant-Favorable Holdover Clause with Owner,” available to subscribers here.