Tenant Leasing Illustrated – May 2015 – A Forecast of Unseasonable Holdover

A Forecast of Unseasonable Holdover

As I sit outside on a warm spring day, my traumatized subconscious fears it may snow any minute now. Here in the northeast, winter was like a house guest that would not leave.

Naturally as New Yorkers we lean toward hyperbole, as when our Mayor told us that we would face the worst storm in history and he shut down the subways for the first time since Peter Stuyvesant was in charge.

That storm was mostly a bust, causing Jon Stewart to quip “My guess is, if you are watching this program, New York is gone. I hope you remember us for our world-class pizza and bridges and not for our tendency to tell people who innocently have their eyes locked with our eyes to go …”. Well, you get the idea.

But mostly winter kicked in with a vengeance and as we emptied supermarket shelves and hunkered down with our hoarded food, winter overstayed its welcome with unseasonable weather right through April.

Some even suggested that the 2015 winter was one of the seven signs of the apocalypse.

More hyperbole, although I do have it on good authority that it IS a clear sign of the apocalypse that my Mets have one of the best records in baseball. Luckily for all of us, it is only the beginning of May.

Without making character judgments, sometimes tenants can overstay their welcome. Landlords call this “holdover”.

Landlords have legitimate reasons for needing tenants to timely vacate upon the expiration of the lease term. They may have another tenant waiting for the space, possibly with significant demolition or other construction to complete.

Yet, tenants often have legitimate reasons for holding over. The construction of the tenant’s next space may not be complete, another tenant could be holding over in the new space, or a new deal may have fallen through despite all good faith intentions.

In order to incentivize tenants to vacate (which includes all end of term and restoration obligations), it is customary for leases to provide for an increase in the fixed rent and escalation rent paid during the last year of the term for “use and occupancy” for each month (or portion thereof) of the holdover, for example 150% or 200% of such rent, or an increase to the then fair market rent, or the greater of the two.

In addition, landlords will generally make tenants liable for consequential damages due to such holdover, i.e., damages under landlord’s lease with the subsequent tenant due to such holdover, possibly even due to the termination of the next lease by the subsequent tenant because of the delay in its commencement date.

The enforceability of such remedies varies by jurisdiction. Generally, New York litigators say that a remedy of 200% of the rent will be enforceable, but once you get much higher enforceability becomes more questionable. Many courts will also look to provide a landlord with a market rent, no matter the multiple provided in the lease.

Ultimately, a lease is a contract and tenants are obligated to honor the obligation to vacate when their lease term expires and landlords are entitled to a reasonable remedy to enforce that obligation.

But negotiating a reasonable holdover provision will allow the tenant as much flexibility as is reasonably possible in the event of an unexpected storm.

To avoid being plowed in by your holdover provision, address the following eight concerns when negotiating your lease: 

  • Negotiate the percentages. Although your landlord may be entitled to a rent penalty, the amount is negotiable. In most cases, anything more than the greater of (a) 200% of fixed rent and escalation rent during the last year of your term and (b) the fair market rent for your space, is above market. You should also provide a mechanism to resolve disputes regarding the fair market rent (e.g., expedited arbitration).
  • Phase in the percentage increases. Reduce your exposure by phasing in penalties, i.e., 125% of fixed rent and escalation rent for the first 30 or 60 days, then increasing every 30 or 60 days to 150%, then 175%, until you hit 200%.
  • Eliminate consequential damages. Holdover provisions often provide that the rent penalty above is in addition to any other rights of your landlord to recover damages from the premises not being surrendered on time, including consequential damages. You can argue that the negotiated holdover penalty is incentive enough for you to timely vacate and consequential damages are inappropriate. This is usually a very difficult point to win.
  • Provide a grace period for consequential damages. Consequential damages could be quite extensive depending on the terms of your landlord’s subsequent lease, so you should build in a grace period of 30, 60 or 90 days before such consequential damages can be realized.
  • Require notice of potential consequential damages. Require that your landlord provide you with timely notice of impending consequential damages so that you can know the extent of your exposure and properly assess alternatives.
  • Request vacating floor by floor. Although difficult to obtain other than on a large multi-floor lease and when you have a good deal of leverage, it would benefit you to have the right to vacate the premises on a floor by floor basis and pay the holdover charges on only the portion of the space that you have not vacated. This can benefit the landlord too by creating the incentive for you to free up space, but landlords generally object since they may be leasing your entire space to one new tenant.
  • Request per diem payments. Generally, if you holdover for any portion of a month, you are responsible as a “month to month” tenant for the rent at the higher rate for the entire month. Although it is true that your landlord cannot rent out the space for that entire month, it is also likely that your landlord needs the space back to perform construction work and may only be damaged by the delay for the holdover portion of the month. This is also a difficult point to win unless you are a very large tenant with a good deal of leverage.
  • Sublease considerations. Sublandlords and subtenants must both be aware (and address) that a subtenant holding over may trigger holdover penalties under the sublandlord’s overlease which may greatly exceed the holdover penalties under the sublease if the subtenant subleases only a portion of the sublandlord’s premises.

Although I live by the philosophic credo, “I whine, therefore I am”, I should not complain about the winter. My brother Mike lives outside of Boston and he had 787 inches of snow, all in one weekend. Follow our eight suggestions above, and at least your holdover provision will not leave you out in the cold.