Hold-over clauses in commercial leases: Who cares? That depends
A hold-over clause in a commercial lease typically provides that if a tenant remains in possession of the leased premises after the expiration of the stated lease term, the tenant must pay rent to the landlord in an amount substantially in excess of the rental rate at the end of the term – often as high as 150 percent to 200 percent. The hold-over clause often receives little attention in commercial lease negotiations. This is particularly true in a less robust market, such as what was experienced a few years ago during the so-called “great recession” when landlords were generally happy to allow the tenant to remain in possession after expiration of the lease term for the significantly increased rental rate. This was often the case since a lease entered into prior to the recession may have had a rental rate higher than what the landlord could obtain at the end of the lease term.
But what about in times of better market conditions? Under such circumstances, both the landlord and the tenant should pay careful attention to the hold-over clause. For example, a typical hold-over clause may simply state that if the tenant holds over after the expiration of the lease term, the tenancy becomes a month-to-month tenancy at the increased rental rate. Some hold-over clauses may state that at the end of the lease term the tenant must vacate the leased premises, but if it does not, it becomes a month-to-month tenant at the increased rental rate. Still other hold-over clauses may indicate that there is no right to hold-over after expiration of the lease term and that the tenancy will not become a month-to-month tenancy, but that if the tenant does hold-over it must pay rent at the increased amount. Variations of these themes in hold-over clauses are numerous.
Under which of these scenarios may a landlord refuse to allow the tenant to remain in possession as a month-to-month tenant? Well, that depends. In most jurisdictions (if not all), the landlord who does not want the tenant to remain on the premises may be required to evict the tenant. Assuming this is true in your jurisdiction, the question then becomes, when may the landlord initiate eviction proceedings? If the tenant informs the landlord prior to the expiration of the lease term that it will hold-over after expiration of the term, can the landlord begin eviction proceedings before the end of the term to ensure that the space is available for the next tenant? Well, again, that depends. If your lease contains a hold-over provision similar to that in our first example above, it is very likely that the tenant will be able to remain in possession for at least one month under the month-to-month tenancy. As for the other scenarios, well, you guessed it – it depends. The facts under such other scenarios will be important in determining the outcome.
Whether you are a landlord or a tenant, if you find yourself in any of these possible scenarios, it will be important to consult with your real estate attorney before taking any action with regard to the hold-over situation under your commercial lease.