FRAZIER BAKER & WILL BARDEN
Holdover is a term used in commercial property leases that describes continued occupancy by a tenant beyond the expiration of the lease, also known as “tenancy-at-sufferance.” Most office leases usually devote a section of the lease to this situation and impose a financial penalty on the tenant for not taking action by either vacating the space, or renewing or extending the term. This financial penalty can sometimes be viewed by the tenant as a “holdup” by the landlord because it can amount to a considerable amount of money. Who’s really suffering here?
In our view, it is reasonable for the property owner to seek stable cash flow, in the form of rent, from his or her investment. So, it is also reasonable for there to be a financial incentive in favor of the landlord in the event that inaction by the tenant frustrates or interferes with the landlord’s goal of stabilized rental income from the property. However, It doesn’t take a 100 percent penalty to get someone’s attention. We have seen office leases that impose a 200 percent rent for each month the tenant continues to occupy the premises beyond the lease expiration, plus reimbursement in proven damages suffered by the landlord if he or she should lose a replacement tenant. This is pretty severe and is easily reduced during lease negotiation to a more reasonable amount if any.
Large-space tenants can sometimes create a continuation of the lease beyond expiration without any increase in monthly rent. Depending on the space size, we have seen holdover rent equal to the expiring monthly rent for up to six additional months. Tenants with smaller spaces should expect to see some penalty, but it can usually be reduced to 125 percent to 150 percent of expiring rent if addressed in the lease negotiation process. And tenants should never make themselves liable for consequential damages suffered by the landlord in the event of holdover.
Like everything in business, each situation is different, and you will have to examine the circumstances that exist prior to lease commencement to properly negotiate the holdover rent issue. But read the lease thoroughly and look for any penalty you might suffer in case you fail to vacate or renew in a timely manner. When you are a prospective tenant, the landlord will view this as a non-economic concession that can be easily granted if requested.
Of course, the best way to avoid the entire holdover penalty issue in the first place is to plan well in advance for your lease renewal. If relocation is a consideration, start planning as many as 12 to 18 months before your lease expires to be sure you have enough time to find the right location and plan for and make necessary improvements. If relocation is not a consideration, you should still allow up to six months to survey current rental rates in your submarket and negotiate the most favorable terms possible for your lease renewal.
Frazier Baker and Will Barden, vice presidents of office services, provide office tenant representation services for Colliers International Memphis.